avatar Constellation Brands, Inc. Manufacturing

Pages

  • Page 1

    WORTH REACHING FOR FISCAL YEAR 2019 SUMMARY ANNUAL REPORT


  • Page 2

    A constellation is, by definition, a group of related things. At Constellation Brands, that concept holds 100% true. We are made up of many things, each contributing to the strength, resilience, and betterment of the whole. We’re made stronger by the diversity of thinking and skill sets of our people, by the breadth and depth of our brands, by the strategies on which we execute, the innovations we create, and by the investments we make. No single thing makes us strong enough to create the future we’ve imagined. We’re able to reach for the stars because we are many, acting as one.


  • Page 3

    DEAR SHAREHOLDERS: The consumer-led premiumization trend continued to manifest across all beverage alcohol segments last year. High-end beer, and higher-end wine and spirits brands significantly outperformed their lower-end counterparts in total dollar growth. The numbers are clear and leave little doubt, the higher-end is where consumers are migrating, and higher-end brands are driving most of the growth in the beverage alcohol category. Staying ahead of emerging consumer trends has been key to our success since our founding in 1945 – it’s just part of our DNA. We are relentlessly focused on the consumer and winning where today’s consumer lives. This means not only building a portfolio of brands consumers love today, but TOTAL U.S. BEVERAGE ALCOHOL CATEGORY (1) pushing beyond to meet their evolving needs well into the future. DO LLAR G R OW TH CATE GORY IN 2018 V S . 2017 We’re always looking ahead and willing to make High-End Beer 8% smart, calculated and bold decisions that help drive industry-leading growth and shareholder Higher- End Spirits 10% value. We’re agile enough to adapt to changing Higher-End Wine 9% consumer preferences, and we’re not afraid to Lower-End Spirits 2% disrupt the industry or ourselves to achieve our long-term goals. This strategy has allowed Lower-End Wine (-1%) Constellation Brands to become the fastest- Low-End Beer (-4%) growing large CPG company in the U.S. at retail over the past two years(2). In keeping with our continuous drive for growth, we made some bold moves in fiscal 2019. We agreed to divest approximately 30 lower-end wine and spirits brands and honed our portfolio’s focus on a smaller set of higher-end, higher-margin power brands. The iconic brands remaining in our reshaped portfolio — Kim Crawford, the Robert Mondavi brand family, The Prisoner Wine Company brand family, Meiomi, SVEDKA Vodka, and High West Whiskey, among others — have strong momentum and excellent runways for growth. With a more streamlined portfolio and tighter organizational focus, we can double down on efforts to accelerate growth and profitability. (1) Source: IRI, Total U.S. Multi-Outlet + Convenience for the 52 weeks ending December 2, 2018; High-end beer defined as >$25 per case at retail; higher-end wine defined as >$11 per bottle at retail, and includes Premium Box; higher-end spirits defined as generally >$13-$17 per bottle at retail, ranges based on category; lower-end products considered below the price points listed for each category. Dollar Sales of categories are based on company estimates. (2) Source: IRI MULO+C POS data. IRI Consulting & BCG analysis.


  • Page 4

    We also continued our push into new market territory by substantially increasing our ownership stake in Canopy Growth Corporation, a leading diversified cannabis company. The additional investment strengthens Canopy’s first mover advantage as it builds a pathway to dominate the emerging cannabis category, conservatively estimated to account for more than $200 billion in sales over the next 10 years(3). Backed by our investment, business discipline, and brand building expertise, we believe this relationship will be a game changer for our company as consumer attitudes about cannabis continue to evolve. Following approval of Canopy’s recently announced agreement with Acreage Holdings, a leading multi-state cannabis operator in the U.S., Canopy Growth will be poised and ready to enter the U.S. market with new products in a variety of formats when it is federally permissible. We’re restless to deliver what’s next so we’re building a strong pipeline of new, innovative LEADERSHIP TRANSITION products leveraging the power of existing brands to fill the gaps in our portfolio and complement In March, 2019, Bill Newlands our core franchise. Last year was a monumental shift for the Corona brand family as we expanded succeeded Rob Sands as President beyond Corona Extra and Corona Light with the and CEO of the company. Rob Sands successful national launch of Corona Premier, the first new Corona in over 25 years, and assumed the role of Executive introduced new packaging for Corona Familiar. Chairman and Richard Sands Both Premier and Familiar have significantly exceeded our expectations. And the innovation became Executive Vice Chairman. doesn’t stop there. This year we plan to extend the Corona Masterbrand to take advantage of consumer trends with the national launch of Corona Refresca, a brand extension that brings a completely new drinker to the Corona franchise and allows us to carve out a space within the large and growing FMB (flavored malt beverage) category that’s anchored in Corona’s carefree lifestyle. Innovation has become an important part of our growth profile. Constellation Ventures, our venture capital arm, launched an exciting new initiative that will help fuel our long-term success. The group committed to invest $100 million over the next 10 years in female- founded or female-led businesses. Women are currently an underserved part of our consumer base and have an estimated purchasing power between $5-$15 trillion annually in the U.S.(4). We believe investing in women-led businesses is critical to the future success of Constellation and the industry, and we’re excited about this opportunity to increase our pipeline for ideas and talent, drive incremental revenue, and increase our knowledge about this important demographic. (3) Constellation estimates, Marijuana Business Daily Factbook 2017 Note: THC cannabis remains illegal at a federal level in the United States (4) Source: Nielsen Consumer, 2013


  • Page 5

    While our focus on the future drives our business strategy, our people truly enable us to succeed. Through various talent development initiatives including our Executive Development, Emerging Executives and Women’s Leadership Development Programs, as well as Diversity & Inclusion initiatives including recently established business resource groups supporting women, Hispanic/Latino employees, LGBTQ employees and early career professionals, we are committed to developing and empowering employees to drive impactful change within Constellation Brands, for our consumers, and in the diverse communities where we live and work. We believe this is critical to our business and future growth. Bottom line - we will never be complacent about our business. Our ability to adapt to shifting market trends and our willingness to constantly reach for new heights, fuel our success now and will continue to do so in the future. I’m extremely thankful for the hard work, passion, and dedication of our talented employees, and for the efforts and commitment of our valued business partners. As always, they are the energy, intelligence, and inspiration behind everything we’ve been able to accomplish, and the real drivers of our success. On behalf of our executive team, I want to thank you, our valued shareholders, for your confidence in us, and for believing in our vision to deliver what’s next. We ask that you join us in discovering why Constellation Brands is a company worth reaching for by exploring our interactive company profile at https://companyprofile.cbrands.com/2019. Cheers, Bill Newlands PRESIDENT & CEO CONSTELLATION BRANDS


  • Page 6

    FISCAL 2019 HIGHLIGHTS # 1 U.S. RETAIL DOLLAR SALES GROWTH OF BEVERAGE ALCOHOL SUPPLIERS CONSTELLATION BRANDS Constellation is #1 in retail dollar sales growth COMPETITORS contributing almost 30% of TBA growth. $ 4.5 EXPECTED RETURN TO SHAREHOLDERS B $ 3.9 RETURNED TO SHAREHOLDERS B $ 2.2 B OVER THE NEXT THREE YEARS OVER THE LAST THREE YEARS OPERATING CASH FLOW Constellation Brands committed to Constellation brands returned $3.9 Constellation Brands reported return $4.5 billion in the form of billion in the form of dividends and record operating cash flow of more dividends and share repurchases over share repurchases to shareholders than $2.2 billion for fiscal 2019. the next three years to shareholders. over the last three years. Source: IRI, Total U.S. Multi-Outlet + Convenience; reflects growth for the 52 weeks ending February 24, 2019 against the comparable prior year period; National Alcohol Beverage Control Association (NABCA), 12 months ending February 2019; TBA = Total Beverage Alcohol


  • Page 7

    UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2019 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-08495 CONSTELLATION BRANDS, INC. (Exact name of registrant as specified in its charter) Delaware 16-0716709 State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 207 High Point Drive, Building 100 Victor, New York 14564 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code (585) 678-7100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Class A Common Stock (par value $.01 per share) New York Stock Exchange Class B Common Stock (par value $.01 per share) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


  • Page 8

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing sales prices of the registrant’s Class A and Class B Common Stock as reported on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second fiscal quarter was $33,122,314,698. The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of April 17, 2019, is set forth below: Class Number of Shares Outstanding Class A Common Stock, par value $.01 per share 166,883,483 Class B Common Stock, par value $.01 per share 23,316,614 Class 1 Common Stock, par value $.01 per share 1,149,714 DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement of Constellation Brands, Inc. to be issued for the Annual Meeting of Stockholders which is expected to be held July 16, 2019 is incorporated by reference in Part III to the extent described therein.


  • Page 9

    TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 21 Item 2. Properties 22 Item 3. Legal Proceedings 23 Item 4. Mine Safety Disclosures 23 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of 23 Equity Securities Item 6. Selected Financial Data 24 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 49 Item 8. Financial Statements and Supplementary Data 51 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 113 Item 9A. Controls and Procedures 113 Item 9B. Other Information 114 PART III Item 10. Directors, Executive Officers and Corporate Governance 114 Item 11. Executive Compensation 114 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 115 Matters Item 13. Certain Relationships and Related Transactions, and Director Independence 115 Item 14. Principal Accounting Fees and Services 116 PART IV Item 15. Exhibits, Financial Statement Schedules 116 Item 16. Form 10-K Summary 116


  • Page 10

    This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. All statements other than statements of historical fact included in this Annual Report on Form 10-K, including without limitation (I) the statements under Item 1 “Business” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding (i) our business strategy, future operations, future financial position, future net sales and expected volume trends, expected effective tax rates and anticipated tax liabilities, prospects, plans and objectives of management, (ii) information concerning expected or potential actions of third parties, including insurance carrier reimbursements or potential changes to international trade agreements, tariffs, taxes and other governmental rules and regulations, (iii) information concerning the future expected balance of supply and demand for our products, (iv) timing and source of funds for operating activities, (v) the manner, timing and duration of the share repurchase program and source of funds for share repurchases, and (vi) the amount and timing of future dividends; (II) the statements regarding our beer expansion, construction and optimization activities, including anticipated costs and timeframes for completion; (III) the statements regarding (i) the volatility of the fair value of our investments in Canopy measured at fair value, (ii) our activities following the close of the November 2018 Canopy Transaction, (iii) the time to return to our targeted leverage ratio following the close of the November 2018 Canopy Transaction, (iv) the New November 2018 Canopy Warrants, and (v) our future ownership level in Canopy and (IV) the statements regarding the Wine and Spirits Transaction, expected gain or loss, amount and use of expected proceeds, estimated remaining costs and expected restructuring charge are forward-looking statements. When used in this Annual Report on Form 10-K, the words “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. In addition to the risks and uncertainties of ordinary business operations and conditions in the general economy and markets in which we compete, our forward-looking statements contained in this Annual Report on Form 10-K are also subject to the risk and uncertainty that (i) the actual balance of supply and demand for our products will vary from current expectations due to, among other reasons, actual raw material supply, actual shipments to distributors and actual consumer demand, (ii) the actual demand, net sales and volume trends for our products will vary from current expectations due to, among other reasons, actual shipments to distributors and actual consumer demand, (iii) the amount, timing and source of funds for any share repurchases may vary due to market conditions, our cash and debt position, the impact of the beer operations expansion activities, the impact of the November 2018 Canopy Transaction, the expected impacts of the Wine and Spirits Transaction and the New November 2018 Canopy Warrants, and other factors as determined by management from time to time, (iv) the amount and timing of future dividends may differ from our current expectations if our ability to use cash flow to fund dividends is affected by unanticipated increases in total net debt, we are unable to generate cash flow at anticipated levels, or we fail to generate expected earnings, (v) the fair value of our investments in Canopy may vary due to market and economic conditions in Canopy’s markets and business locations, (vi) the timeframe and actual costs associated with the beer operations expansion activities may vary from management’s current expectations due to market conditions, our cash and debt position, receipt of required regulatory approvals by the expected dates and on the expected terms, and other factors as determined by management, (vii) any consummation of the Wine and Spirits Transaction and any actual date of consummation may vary from our current expectations and the actual restructuring charge, if any, will vary based on management’s final plans, and (viii) the time to return to our targeted leverage ratio may vary from management’s current expectations due to market conditions, our ability to generate cash flow at expected levels and our ability to generate expected earnings. The Wine and Spirits Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approvals. Modification of the November 2018 Canopy Warrants is subject to, among other things, Canopy shareholder approval of the modification of the November 2018 Canopy Warrants and Canopy shareholder approval of its proposed transaction with Acreage. Additional important factors that could cause actual results to differ materially from those set forth in or implied by our forward-looking statements contained in this Annual Report on Form 10-K are those described in Item 1A “Risk Factors” and elsewhere in this report and in our other filings with the Securities and Exchange Commission.


  • Page 11

    Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. All references to “net sales” refer to gross sales less promotions, returns and allowances, and excise taxes consistent with the Company’s method of classification. All references to “Fiscal 2019,” “Fiscal 2018” and “Fiscal 2017” refer to the Company’s fiscal year ended the last day of February of the indicated year. All references to “Fiscal 2020” refer to our fiscal year ending February 29, 2020. All references to “$” are to U.S. dollars, all references to “C$” are to Canadian dollars and all references to “A$” are to Australian dollars. Unless otherwise defined herein, refer to the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for the definition of capitalized terms used herein. Market positions and industry data discussed in this Annual Report on Form 10-K are as of calendar 2018 and have been obtained or derived from industry and government publications and our estimates. The industry and government publications include: Beer Marketers Insights; Beverage Information Group; Growers Network; Impact Databank Review and Forecast; International Wine and Spirits Research (IWSR); IRI; and National Alcohol Beverage Control Association. We have not independently verified the data from the industry and government publications. Unless otherwise noted, all references to market positions are based on equivalent unit volume. PART I Item 1. Business. Introduction We are an international producer and marketer of beer, wine and spirits with operations in the U.S., Mexico, New Zealand, Italy and Canada with powerful, consumer-connected, high-quality brands like Corona, Modelo Especial, Robert Mondavi, Kim Crawford, Meiomi and SVEDKA Vodka. In the U.S., we are the number one sales growth driver at retail among beverage alcohol suppliers. We are the third-largest beer company in the U.S. market and a leading, higher-end wine company in the U.S. market. Many of our products are recognized as leaders in their respective categories. This, combined with our strong market positions, makes us a supplier of choice to many of our customers, who include wholesale distributors, retailers and on-premise locations. Our vision is to elevate life with every glass raised and our mission is to build brands that people love. We are committed to brand building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Our key values are: people; customer focus; entrepreneurship; quality; and integrity. The Company is a Delaware corporation incorporated on December 4, 1972, as the successor to a business founded in 1945. We have approximately 9,800 employees located primarily in the U.S. and Mexico, with our corporate headquarters located in Victor, New York. We conduct our business through entities we wholly own as well as through a variety of joint ventures and other entities. Strategy Our overall strategy is to drive industry-leading growth and shareholder value by building brands that people love when celebrating big moments or enjoying quiet ones. We position our portfolio to benefit from the consumer-led trend toward premiumization, which we believe will continue to result in faster growth rates in the higher-end of the beer, wine and spirits categories. 1


  • Page 12

    To capitalize on premiumization trends, become more competitive and grow our business, we have generally employed a strategy focused on a combination of organic growth and acquisitions, with a focus on the higher-margin, higher-growth categories of the beverage alcohol industry. Key elements of our strategy include: leveraging our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio and to provide for cross promotional opportunities; strengthening relationships with wholesalers and retailers by providing consumer and beverage alcohol insights; investing in brand building and innovation activities; positioning ourselves for success with consumer-led products that identify, meet and stay ahead of evolving consumer trends and market dynamics; realizing operating efficiencies through expanding and enhancing production capabilities and maximizing asset utilization; and developing employees to enhance performance in the marketplace. In the beer business, we have solidified our position in the U.S. beer market; enhanced our margins, results of operations and operating cash flow; and provided new avenues for growth. We have made capital investments and acquisitions to increase beer production capacity to secure independence from a supply standpoint and to support the growth of the business. Additionally, in an effort to more fully compete in growing sectors of the high- end segment of the U.S. beer market, we’ve made several acquisitions of high-quality, regional craft beer brands and leveraged our innovation capabilities to introduce new brands that align with consumer trends. In our wine and spirits business, as part of our efforts to focus on higher-end brands, improve margins and create operating efficiencies, we have acquired higher-margin, higher-growth wine brands and portfolios of brands, including Meiomi, Prisoner and Charles Smith, and have strategically optimized the value of this business, particularly lower-margin, lower-growth products, with the divestiture of the Canadian wine business and the expected transaction, which was recently announced, to divest a portion of our wine and spirits business. In addition, we have added higher-end brands to our spirits portfolio through the acquisitions of Casa Noble tequila and High West craft whiskeys. Within our Corporate Operations and Other segment, we complemented our total beverage alcohol strategy in an adjacent category by making investments in Canopy, a world-leading, diversified cannabis company. These investments are consistent with our long-term strategy to identify, meet and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property and retailing. For further information on our strategy, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Annual Report on Form 10-K (“MD&A”). Investments and Acquisitions In connection with our strategy outlined above, we completed the following investments and acquisitions during Fiscal 2019: Transaction Date Strategic Contribution Corporate Operations and Other Segment Canopy Growth Corporation November Investment in Ontario, Canada-based public company; leading provider of investments 2018 medicinal and recreationally legal cannabis products; supported our long- and term strategy to identify, meet and stay ahead of evolving consumer trends June 2018 and market dynamics. Beer Segment Four Corners acquisition July Portfolio of high-quality, dynamic and bicultural, Texas-based craft beers; 2018 strengthened our position in the high-end segment of the U.S. beer market. 2


  • Page 13

    For further information about our Fiscal 2019, Fiscal 2018 and Fiscal 2017 transactions, refer to (i) MD&A and (ii) Notes 2, 7 and 10 of the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K (“Notes to the Financial Statements”). Business Segments We report our operating results in three segments: (i) Beer, (ii) Wine and Spirits, and (iii) Corporate Operations and Other. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management and the structure of our internal financial reporting. We report net sales in two reportable segments, as follows: For the Year For the Year For the Year Ended Ended Ended February 28, % of February 28, % of February 28, % of 2019 Net Sales 2018 Net Sales 2017 Net Sales (in millions) Beer $ 5,202.1 64.1% $ 4,660.4 61.5% $ 4,227.3 57.7% Wine and Spirits: Wine 2,532.5 31.2% 2,556.3 33.7% 2,732.7 37.4% Spirits 381.4 4.7% 363.6 4.8% 361.1 4.9% Total Wine and Spirits 2,913.9 35.9% 2,919.9 38.5% 3,093.8 42.3% Consolidated Net Sales $ 8,116.0 $ 7,580.3 $ 7,321.1 Beer Segment We are the leader in the high-end segment of the U.S. beer market, which includes the imported, craft, domestic super premium, and alternative beverage alcohol categories. We sell a number of brands in the high-end categories, driven largely by our imported Mexican beer portfolio. Within the imported beer category, we have the exclusive right to import, market and sell these Mexican beer brands in all 50 states of the U.S.: Corona Brand Family Modelo Brand Family Other Import Brands Corona Extra Modelo Especial Pacifico Corona Premier Modelo Negra Victoria Corona Familiar Modelo Chelada Corona Light In the U.S., we are the leading imported beer company and have eight of the 15 top-selling imported beer brands. Corona Extra is the best-selling imported beer and the sixth best-selling beer overall in the U.S. and Modelo Especial is the second-largest and the fastest-growing major imported beer brand. Since the June 2013 acquisition of the imported beer business, we have more than tripled our production capacity in Mexico from 10 million to approximately 34 million hectoliters. Our current production capacity provides us the opportunity to further expand our leadership position in the high-end segment of the U.S. beer market by increasing our investment behind on-trend innovation. As part of these efforts, we successfully introduced Corona Premier, a lower-calorie, lower-carbohydrate product offering, which has become one of the top growth contributors in the high-end segment of the U.S. beer market. For Fiscal 2020, we are launching Corona Refresca nationally to capitalize on the growth of the high-end alternative beverage alcohol category. Additionally, we are continuing efforts focused on increasing sales distribution of products in can, draft, single-serve and larger package size formats. Expansion and construction efforts continue under our Mexico Beer Expansion Projects. Since the June 2013 acquisition of the imported beer business, we have invested approximately $3.5 billion for the Mexico Beer Expansion Projects, with approximately $600 million during Fiscal 2019. To align with our anticipated future 3


  • Page 14

    growth expectations, we are targeting an additional 10 million hectoliters of production capacity expansion activities to be completed over the next four fiscal years. Our craft and specialty beer products are primarily sold under the Ballast Point brand. Ballast Point is led by its popular Sculpin IPA. In addition, the Funky Buddha and Four Corners acquisitions allow us to leverage our craft beer platform, capitalizing on the growth of high-quality, regional craft beer brands. Overall, our craft and specialty beer capabilities further strengthen our position as the leader in the high-end segment of the U.S. beer market. Wine and Spirits Segment We are a leading, higher-end wine and spirits company in the U.S. market, with a portfolio that includes higher-margin, higher-growth wine and spirits brands. Our wine portfolio is supported by grapes purchased from independent growers, primarily in the U.S., New Zealand and Chile, and vineyard holdings in the U.S., New Zealand and Italy. Our wine produced in the U.S., New Zealand and Italy is primarily marketed in the U.S. In addition, we export our wine products to Canada and other major world markets. Our spirits offerings include SVEDKA Vodka, which is imported from Sweden and is the largest imported vodka brand in the U.S. Our higher- end spirits brands include Casa Noble tequila and High West craft whiskeys. In the U.S., we have 18 of the 100 top-selling wine brands. Some of our well-known wine and spirits brands, and portfolio of brands, sold in the U.S., which comprised our Fiscal 2019 U.S. Focus Brands (“Focus Brands”), included: Wine Portfolio Wine Brands of Brands Spirits Brands 7 Moons Mark West Robert Mondavi Charles Smith Casa Noble Black Box Meiomi Ruffino Prisoner High West Clos du Bois Mount Veeder Schrader SVEDKA Vodka Franciscan Estate Nobilo Simi Kim Crawford Ravage The Dreaming Tree We dedicate a large share of sales and marketing resources to our Focus Brands as they represent a majority of our U.S. wine and spirits revenue and profitability, and generally hold strong positions in their respective price categories. We have been increasing resources in support of on-trend product innovation as we believe this is one of the key drivers of overall beverage alcohol category growth. In wine, we have launched varietal line extensions behind many of our Focus Brands, such as Bourbon Barrel Aged Robert Mondavi Private Selection and Meiomi Rosé, and we have introduced newer brands like Derange, Spoken Barrel, Cooper & Thief and Crafters Union. In spirits, we have introduced Mi CAMPO tequila. In connection with our efforts to increase focus on higher-margin, higher-growth brands, in April 2019, we entered into a definitive agreement to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices and facilities, for approximately $1.7 billion, subject to certain closing adjustments. The Wine and Spirits Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approvals (see “Recent Developments” in MD&A and Note 23 of the Notes to the Financial Statements). Corporate Operations and Other The Corporate Operations and Other segment includes traditional corporate-related items including costs of executive management, corporate development, corporate finance, corporate growth and strategy, human resources, internal audit, investor relations, legal, public relations and information technology, as well as our investments in Canopy and those made through our corporate venture capital function. 4


  • Page 15

    Further information regarding net sales, operating income and total assets of each of our business segments and information regarding geographic areas is set forth in Note 22 of the Notes to the Financial Statements. Marketing and Distribution To focus on their respective product categories, build brand equity and increase sales, our segments employ full-time, in-house marketing, sales and customer service functions. These functions engage in a range of marketing activities and strategies, including market research, consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship, on-premise promotions and public relations. Where opportunities exist, particularly with national accounts in the U.S., we leverage our sales and marketing skills across the organization. In the U.S., our products are primarily distributed by wholesale distributors, with generally separate distribution networks utilized for (i) our beer portfolio and (ii) our wine and spirits portfolio, as well as state alcohol beverage control agencies. As is the case with all other beverage alcohol companies, products sold through these agencies are subject to obtaining and maintaining listings to sell our products in that agency’s state. State governments can affect prices paid by consumers of our products through the imposition of taxes or, in states in which the government acts as the distributor of our products through an alcohol beverage control agency, by directly setting the retail prices. Trademarks and Distribution Agreements Trademarks are an important aspect of our business. We sell products under a number of trademarks, which we own or use under license. Throughout our segments, we also have various licenses and distribution agreements for the sale, or the production and sale, of our products and products of third parties. These licenses and distribution agreements have varying terms and durations. Within the Beer segment, we have an exclusive sub-license to use trademarks related to our Mexican beer brands in the U.S. This sub-license agreement is perpetual. Prior to our June 2013 acquisition of the imported beer business, Crown Imports had exclusive importation agreements with the suppliers of certain imported beer products and had an exclusive renewable sub-license to use certain trademarks related to the imported beer brands in the U.S. Competition The beverage alcohol industry is highly competitive. We compete on the basis of quality, price, brand recognition and distribution strength. Our beverage alcohol products compete with other alcoholic and non- alcoholic beverages for consumer purchases, as well as shelf space in retail stores, restaurant presence and wholesaler attention. We compete with numerous multinational producers and distributors of beverage alcohol products, some of which have greater resources than we do. Our principal competitors include: Beer Anheuser-Busch InBev, Molson Coors, Heineken, Pabst Brewing Company, The Boston Beer Company, Mark Anthony Wine E. & J. Gallo Winery, The Wine Group, Trinchero Family Estates, Treasury Wine Estates, Ste. Michelle Wine Estates, Deutsch Family Wine & Spirits, Jackson Family Wines Spirits Diageo, Beam Suntory, Brown-Forman, Sazerac Company, Pernod Ricard Production Our current production capacity in Mexico at our Nava and Obregon breweries is approximately 34 million hectoliters. Prior to the acquisition of the Obregon Brewery, we entered into a three-year interim supply agreement with Modelo in June 2013, which was initially extended for one additional year through June 2017. However, the purchase of the Obregon Brewery enabled us to become fully independent from this interim supply agreement, which was terminated at the time of this acquisition. In addition, we are expanding the Obregon Brewery and constructing the Mexicali Brewery, located near California, which is our largest imported beer market in the U.S. 5


  • Page 16

    Based on our anticipated future growth expectations, we intend to expand our production capacity in Mexico to approximately 44 million hectoliters over the next four fiscal years. Our craft beer production requirements are primarily fulfilled by our Miramar and Daleville facilities, located in the greater San Diego, California, and Roanoke, Virginia, areas, respectively. These facilities can be expanded to accommodate future growth. We also operate multiple tap rooms with smaller scale production and innovation capabilities. In the U.S., we operate 18 wineries using many varieties of grapes grown principally in the Napa, Sonoma, Monterey and San Joaquin regions of California. We also operate three wineries in New Zealand and six wineries in Italy. Grapes are crushed at most of our wineries and stored as wine until packaged for sale under our brand names or sold in bulk. The inventories of wine are usually at their highest levels during and after the crush of each year’s grape harvest and are reduced prior to the subsequent year’s crush. Wine inventories are usually at their highest levels in September through November in the U.S. and Italy, and in March through May in New Zealand. Our Canadian whisky requirements are produced and aged at our Canadian distillery in Lethbridge, Alberta. We currently operate two facilities in the U.S. for the production of our High West whiskey brand. The requirements for grains and bulk spirits used in the production of our spirits are purchased from various suppliers. Certain of our wines and spirits must be aged for more than one year up to multiple years. Therefore, our inventories of wines and spirits may be larger in relation to sales and total assets than in many other businesses. Sources and Availability of Production Materials The principal components in the production of our Mexican and craft beer brands include water; agricultural products, such as yeast and grains; and packaging materials, which include glass, aluminum and cardboard. For our Mexican beer brands, packaging materials represent the largest cost component of production, with glass bottles representing the largest cost component of our packaging materials. For Fiscal 2019, the package format mix of our Mexican beer volume sold in the U.S. was 69% glass bottles, 28% aluminum cans and 3% in stainless steel kegs. The Nava and Obregon breweries receive water originating from aquifers. We believe we have adequate access to water to support the breweries’ on-going requirements, as well as future requirements after the completion of planned expansion activities. As part of our efforts to solidify our beer glass sourcing strategy over the long-term, we formed an equally- owned joint venture with Owens-Illinois, the world’s largest glass container manufacturer. The joint venture acquired a state-of-the-art glass production plant that is located adjacent to our Nava Brewery in Mexico, in December 2014. The glass plant currently has four operational glass furnaces and the joint venture intends to increase it to five furnaces by the end of calendar 2019. When fully operational with five furnaces, the glass plant is expected to supply approximately 60% of our glass requirements for the Nava Brewery. We also have long-term glass supply agreements with other glass producers. The principal components in the production of our wine and spirits products are agricultural products, such as grapes and grain, and packaging materials (primarily glass). Most of our annual grape requirements are satisfied by purchases from each year’s harvest which normally begins in August and runs through October in the U.S. and Italy, and begins in February and runs through May in New Zealand. We receive grapes from approximately 800 independent growers in the U.S. and approximately 165 independent growers located primarily in New Zealand and Chile. We enter into purchase agreements with a majority of these growers with pricing that generally varies year-to-year and is largely based on then-current market prices. 6


  • Page 17

    As of February 28, 2019, we owned or leased approximately 20,500 acres of land and vineyards, either fully bearing or under development, in the U.S., New Zealand and Italy. This acreage supplies only a small percentage of our overall total grape needs for wine production. However, most of this acreage is used to supply a large portion of the grapes used for the production of certain of our higher-end wines. We continue to consider the purchase or lease of additional vineyards, and additional land for vineyard plantings, to supplement our grape supply. We believe that we have adequate sources of grape supplies to meet our sales expectations. However, when demand for certain wine products exceeds expectations, we look to source the extra requirements from the bulk wine markets around the world. The distilled spirits manufactured and imported by us require various agricultural products, neutral grain spirits and bulk spirits which we fulfill through purchases from various sources by contractual arrangement and through purchases on the open market. We believe that adequate supplies of the aforementioned products are available at the present time. We utilize glass and polyethylene terephthalate (“PET”) bottles and other materials such as caps, corks, capsules, labels, wine bags and cardboard cartons in the bottling and packaging of our wine and spirits products. After grape purchases, glass bottle costs are the largest component of our cost of product sold. In the U.S., the glass bottle industry is highly concentrated with only a small number of producers. We have traditionally obtained, and continue to obtain, our glass requirements from a limited number of producers under long-term supply arrangements. Currently, one producer supplies most of our glass container requirements for our U.S. operations. We have been able to satisfy our requirements with respect to the foregoing and consider our sources of supply to be adequate at this time. Government Regulation We are subject to a range of laws and regulations in the countries in which we operate. Where we produce products, we are subject to environmental laws and regulations, and may be required to obtain environmental and alcohol beverage permits and licenses to operate our facilities. Where we market and sell products, we may be subject to laws and regulations on brand registration, packaging and labeling, distribution methods and relationships, pricing and price changes, sales promotions, advertising and public relations. We are also subject to rules and regulations relating to changes in officers or directors, ownership or control. We believe we are in compliance in all material respects with all applicable governmental laws and regulations in the countries in which we operate. We also believe that the cost of administration and compliance with, and liability under, such laws and regulations does not have, and is not expected to have, a material adverse impact on our financial condition, results of operations or cash flows. Seasonality The beverage alcohol industry is subject to seasonality in each major category. As a result, in response to wholesaler and retailer demand which precedes consumer purchases, our beer sales are typically highest during the first and second quarters of our fiscal year, which correspond to the Spring and Summer periods in the U.S. Our wine and spirits sales are typically highest during the third quarter of our fiscal year, primarily due to seasonal holiday buying. Employees As of February 28, 2019, we had approximately 9,800 employees. Approximately 4,900 employees were in the U.S. and approximately 4,900 employees were outside of the U.S., primarily in Mexico. We may employ additional workers during the grape crushing seasons. Approximately 21% of our employees are covered by collective bargaining agreements. Collective bargaining agreements expiring within one year are minimal. We consider our employee relations generally to be good. 7


  • Page 18

    Executive Officers of the Company Information with respect to our current executive officers is as follows: NAME AGE OFFICE OR POSITION HELD Robert Sands 60 Executive Chairman of the Board Richard Sands 68 Executive Vice Chairman of the Board William A. Newlands 60 President and Chief Executive Officer James O. Bourdeau 54 Executive Vice President, General Counsel and Secretary F. Paul Hetterich 56 Executive Vice President and President, Beer Division Thomas M. Kane 58 Executive Vice President and Chief Human Resources Officer David Klein 55 Executive Vice President and Chief Financial Officer James A. Sabia, Jr. 57 Executive Vice President and Chief Marketing Officer Robert Sands is the Executive Chairman of the Board of the Company, having served in that role since March 2019 and as a director since January 1990. Previously, he served as Chief Executive Officer of the Company from July 2007 through February 2019. Mr. Sands also served as President from December 2002 to February 2018, as Chief Operating Officer from December 2002 to July 2007, as Group President from April 2000 through December 2002, as Chief Executive Officer, International from December 1998 through April 2000, as Executive Vice President from October 1993 through April 2000, as General Counsel from June 1986 through May 2000 and as Vice President from June 1990 through October 1993. He is the brother of Richard Sands. Richard Sands, Ph.D., is the Executive Vice Chairman of the Board of the Company, having served in that role since March 2019. He previously served as Chairman of the Board from September 1999 through February 2019. He has been employed by the Company in various capacities since 1979. He has served as a director since 1982. He served as Chief Executive Officer from October 1993 to July 2007, as Executive Vice President from 1982 to May 1986, as President from May 1986 to December 2002 and as Chief Operating Officer from May 1986 to October 1993. He is the brother of Robert Sands. William A. Newlands is President and Chief Executive Officer of the Company. He has served as Chief Executive Officer since March 2019 and as President since February 2018. He served as Chief Operating Officer from January 2017 through February 2019 and as Executive Vice President of the Company from January 2015 until February 2018. From January 2016 to January 2017 he performed the role of President, Wine & Spirits Division and from January 2015 through January 2016 he performed the role of Chief Growth Officer. Mr. Newlands joined the Company in January 2015. Prior to that he served from October 2011 until August 2014 as Senior Vice President and President, North America of Beam Inc., as Senior Vice President and President, North America of Beam Global Spirits & Wine, Inc., from December 2010 to October 2011, and as Senior Vice President and President, USA of Beam Global Spirits & Wine, Inc. from February 2008 to December 2010. Beam Inc., a producer and seller of branded distilled spirits products, merged with a subsidiary of Suntory Holding Limited, a Japanese company, in 2014. Prior to October 2011, Beam Global Spirits & Wine, Inc. was the spirits operating segment of Fortune Brands, Inc., which was a leading consumer products company that made and sold branded consumer products worldwide in the distilled spirits, home and security, and golf markets. James O. Bourdeau has served as the Company’s Executive Vice President and General Counsel since December 2017 and as the Company’s Secretary since April 2017. Prior to that, Mr. Bourdeau was the Company’s Senior Vice President and General Counsel, Corporate Development, having performed that role from September 2014 until December 2017. Before joining the Company in September 2014, Mr. Bourdeau was an attorney with the law firm of Nixon Peabody LLP from July 2000 through September 2014, and a partner from February 2005 through September 2014. Mr. Bourdeau was associated with another law firm from 1995 to 2000. F. Paul Hetterich has been an Executive Vice President of the Company since June 2003. Since January 2016 Mr. Hetterich has performed the role of President, Beer Division and President of Crown Imports LLC, a wholly-owned subsidiary of the Company. From January 2015 through January 2016 he performed the role of Executive Vice President, Corporate Development & Beer Operations. From June 2011 until January 2015 he 8


  • Page 19

    served as Executive Vice President, Business Development and Corporate Strategy, from July 2009 until June 2011 he served as Executive Vice President, Business Development, Corporate Strategy and International, and from June 2003 until July 2009 he served as Executive Vice President, Business Development and Corporate Strategy. From April 2001 to June 2003 Mr. Hetterich served as the Company’s Senior Vice President, Corporate Development. Prior to that, Mr. Hetterich held several increasingly senior positions in the Company’s marketing and business development groups. Mr. Hetterich has been with the Company since 1986. Thomas M. Kane joined the Company in May 2013 as Executive Vice President and Chief Human Resources Officer. Mr. Kane previously served as Senior Vice President, Human Resources and Government Relations of Armstrong World Industries, Inc., a global producer of flooring products and ceiling systems, from February 2012 to May 2013, he served as its Senior Vice President, Human Resources from August 2010 to February 2012 and served as its Chief Compliance Officer from February 2011 to February 2012. Prior to that, Mr. Kane served as Global Vice President, Human Resources for Black & Decker Power Tools, a manufacturer of power and hand tools, from 2002 to 2010. From 1999 to 2002 Mr. Kane served as Global HR leader of GE Specialty Materials, a large manufacturer of silicone products. David Klein has been the Company’s Executive Vice President and Chief Financial Officer since June 2015. Prior to that, Mr. Klein served as the Company’s Senior Vice President Finance, Beer Division, having held that position from May 2014 until June 2015. He served as the Company’s Senior Vice President and Treasurer from April 2009 to July 2014 and assumed the additional responsibilities of Controller in October 2013, also serving in that role to July 2014. From March 2007 to March 2009 Mr. Klein served as chief financial officer for the Company’s former United Kingdom operations. Mr. Klein joined the Company in 2004 as Vice President of Business Development. James A. Sabia, Jr. has been the Company’s Executive Vice President and Chief Marketing Officer since May 2018. Prior to that, Mr. Sabia was the Chief Marketing Officer of the Company’s Beer Division, having performed that role from February 2009 through May 2018. From February 2009 to June 2013, Mr. Sabia was employed by Crown Imports LLC (“Crown”), of which the Company owned a 50% interest and was the Company’s beer business during that period. Effective June 7, 2013, the Company acquired the remaining 50% of Crown, which became a wholly-owned subsidiary of the Company on that date. Mr. Sabia originally joined the Company in August 2007 as Vice President, Marketing for the Company’s spirits business, serving in that capacity until February 2009. Before that, Mr. Sabia was with Molson Coors Brewing Company, a large international brewing company, from 1990 to 2007. Executive officers of the Company are generally chosen or elected to their positions annually and hold office until the earlier of their removal or resignation or until their successors are chosen and qualified. Company Information Our Internet website is https://www.cbrands.com. Our filings with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are accessible free of charge at https://www.cbrands.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, such as ourselves, that file electronically with the SEC. The Internet address of the SEC’s site is https://www.sec.gov. We have adopted a Chief Executive Officer and Senior Financial Executive Code of Ethics that specifically applies to our chief executive officer, our principal financial officer and our controller, and is available on our Internet site at https://www.cbrands.com/investors. This Chief Executive Officer and Senior Financial Executive Code of Ethics meets the requirements as set forth in the Securities Exchange Act of 1934, Item 406 of Regulation S-K. We also have adopted a Code of Business Conduct and Ethics that applies to all employees, directors and officers, including each person who is subject to the Chief Executive Officer and Senior Financial Executive Code of Ethics. The Code of Business Conduct and Ethics is available on our Internet website, together with our Global Code of Responsible Practices for Beverage Alcohol Advertising and Marketing at https:// 9


  • Page 20

    www.cbrands.com/story/policies. Copies of these materials are available in print to any shareholder who requests them. Shareholders should direct such requests in writing to Investor Relations Department, Constellation Brands, Inc., 207 High Point Drive, Building 100, Victor, New York 14564, or by telephoning our Investor Center at 1-888-922-2150. Our Board of Directors Corporate Governance Guidelines and the Charters of the Board’s Audit Committee, Human Resources Committee (which serves as the Board’s compensation committee) and Corporate Governance Committee (which serves as the Board’s nominating committee) are accessible on our Internet website at https:// www.cbrands.com/investors. Amendments to, and waivers granted to our directors and executive officers under our codes of ethics, if any, will be posted in this area of our website. The information regarding our website and its content is for your convenience only. The content of our website is not deemed to be incorporated by reference in this report or filed with the SEC. Item 1A. Risk Factors. In addition to information discussed elsewhere in this report, you should carefully consider the following factors which could materially affect our business, liquidity, financial condition and/or results of operations. The risks described below are not the only risks we face. Additional factors not presently known to us or that we currently deem to be immaterial may also have a material adverse effect on our business, liquidity, financial condition and/or results of operations in future periods. Operational Risks International operations, worldwide and domestic economic trends and financial market conditions, geopolitical uncertainty, or changes to international trade agreements and tariffs, import and excise duties, other taxes, or other governmental rules and regulations Our products are produced and sold in numerous countries, we have employees in various countries and we have production facilities currently in the U.S., Mexico, New Zealand, Italy and Canada. Risks associated with international operations, any of which could have a material adverse effect on our business, liquidity, financial condition and/or results of operations, include: changes in local political, economic, social and labor conditions; potential disruption from socio-economic violence, including terrorism and drug-related violence; restrictions on foreign ownership and investments or on repatriation of cash earned in countries outside the U.S.; import and export requirements; currency exchange rate fluctuations; a less developed and less certain legal and regulatory environment in some countries, which, among other things, can create uncertainty regarding contract enforcement, intellectual property rights, real property rights, and liability issues; and inadequate levels of compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act. Unfavorable global or regional economic conditions, including economic slowdown, inflation, and the disruption, volatility and tightening of credit and capital markets, as well as unemployment, tax increases, governmental spending cuts or a return of high levels of inflation, could affect consumer spending patterns and purchases of our products. These could also create or exacerbate credit issues, cash flow issues and other financial hardships for us and our suppliers, distributors, retailers and consumers. The inability of suppliers, distributors and retailers to access liquidity could impact our ability to produce and distribute our products. 10


  • Page 21

    We are also exposed to risks associated with interest rate fluctuations. We could experience changes in our ability to manage fluctuations in interest rates and, accordingly, there can be no assurance that we will be successful in reducing those risks. We could also be affected by nationalization of our international operations, unstable governments, unfamiliar or biased legal systems, intergovernmental disputes or animus against the United States. Any determination that our operations or activities did not comply with applicable U.S. or foreign laws or regulations could result in the imposition of fines and penalties, interruptions of business, terminations of necessary licenses and permits, and other legal and equitable sanctions. The U.S. and other countries in which we operate impose duties, excise taxes, and/or other taxes on beverage alcohol products, and/or on certain raw materials used to produce our beverage alcohol products, in varying amounts. The U.S. federal government or other governmental bodies may propose changes to international trade agreements, tariffs, taxes and other government rules and regulations. Significant increases in import and excise duties or other taxes on, or that impact, beverage alcohol products could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. In addition, federal, state, provincial, local and foreign governmental agencies extensively regulate the beverage alcohol products industry concerning such matters as licensing, warehousing, trade and pricing practices, permitted and required labeling, advertising and relations with wholesalers and retailers. Certain federal, state or local regulations also require warning labels and signage. New or revised regulations or increased licensing fees, requirements or taxes could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Additionally, various jurisdictions may seek to adopt significant additional product labeling or warning requirements or limitations on the marketing or sale of our products because of what our products contain or allegations that our products cause adverse health effects. If these types of requirements become applicable to one or more of our major products under current or future environmental or health laws or regulations, they may inhibit sales of such products. These international, economic and political uncertainties and regulatory changes could have a material adverse effect on our business, liquidity, financial condition and/or results of operations, especially to the extent these matters, or the decisions, policies or economic strength of our suppliers and distributors, affect our business, liquidity, financial condition and/or results of operations. Dependence on limited facilities for production of our Mexican beer brands, and expansion and construction issues We are dependent on our Nava and Obregon breweries as our sole sources of supply to fulfill our Mexican beer brands product requirements, both now as well as for the near term. We are currently expanding our Obregon Brewery and constructing our Mexicali Brewery, and our joint venture with Owens-Illinois is expanding its glass plant. While these multi-million-dollar expansion and construction activities are progressing consistent with our plans, there is always the potential risk of completion delays and cost overruns. Expansion of current production facilities and construction of new production facilities are subject to various regulatory and developmental risks, including but not limited to: (i) our ability to obtain timely certificate authorizations, necessary approvals and permits from regulatory agencies and on terms that are acceptable to us; (ii) potential changes in federal, state and local statutes and regulations, including environmental requirements, that prevent a project from proceeding or increase the anticipated cost of the project; (iii) inability to acquire rights-of- way or land or water rights on a timely basis on terms that are acceptable to us; and (iv) inability to acquire the necessary energy supplies, including electricity, natural gas and diesel fuel. Any of these events could delay the expansion or construction of our production facilities. We may not be able to satisfy our product supply requirements for the Mexican beer brands in the event of a significant disruption, partial destruction or total destruction of the Nava or Obregon breweries or the glass plant, or 11


  • Page 22

    difficulty shipping raw materials and product into or out of the United States. Also, if the contemplated expansions of the Obregon Brewery and the glass plant and construction of the Mexicali Brewery are not completed by their targeted completion dates, we may not be able to produce sufficient quantities of our Mexican beer to satisfy our needs. Under such circumstances, we may be unable to obtain our Mexican beer at a reasonable price from another source, if at all. A significant disruption at our Nava or Obregon breweries, or the glass plant, even on a short-term basis, could impair our ability to produce and ship products to market on a timely basis. Alternative facilities with sufficient capacity or capabilities may not readily be available, may cost substantially more or may take a significant time to start production, any of which could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Operational disruptions or catastrophic loss to breweries, wineries, other production facilities or distribution systems All of our Mexican beer brands product supply is currently produced at our breweries in Nava, Coahuila, Mexico and Obregon, Sonora, Mexico. Many of the workers at these breweries are covered by collective bargaining agreements. The glass plant currently produces approximately half of the total annual glass bottle supply for our Mexican beer brands. Several of our vineyards and production and distribution facilities, including certain California wineries and breweries and our planned Mexicali Brewery, are in areas prone to seismic activity. Additionally, we have various vineyards, wineries and breweries in the state of California which has recently experienced wildfires and landslides. If any of these or other of our properties and production facilities were to experience a significant operational disruption or catastrophic loss, it could delay or disrupt production, shipments and revenue, and result in potentially significant expenses to repair or replace these properties. Also, our production facilities are asset intensive. As our operations are concentrated in a limited number of production and distribution facilities, we are more likely to experience a significant operational disruption or catastrophic loss in any one location from acts of war or terrorism, fires, floods, earthquakes, hurricanes, labor strike or other labor activities, cyber-attacks and other attempts to penetrate our information technology systems, unavailability of raw or packaging materials, or other natural or man-made events. If a significant operational disruption or catastrophic loss were to occur, we could breach agreements, our reputation could be harmed, and our business, liquidity, financial condition and/or results of operations could be adversely affected due to higher maintenance charges, unexpected capital spending or product supply constraints. Our insurance policies do not cover certain types of catastrophes. Economic conditions and uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain property damage and business interruption insurance. If our insurance coverage is adversely affected, or to the extent we have elected to self-insure, we may be at greater risk that we may experience an adverse impact to our business, liquidity, financial condition and/or results of operations. If one or more significant uninsured or under-insured events occur, we could suffer a major financial loss. Supply of quality water, agricultural and other raw materials, certain raw materials and packaging materials purchased under short-term supply contracts, limited group of suppliers of glass bottles The quality and quantity of water available for use is important to the supply of our agricultural raw materials and our ability to operate our business. Water is a limited resource in many parts of the world and if climate patterns change and droughts become more severe, there may be a scarcity of water or poor water quality which may affect our production costs or impose capacity constraints. We are dependent on sufficient amounts of quality water for operation of our breweries, our wineries and our distilleries, as well as to irrigate our vineyards and conduct our other operations. The suppliers of the agricultural raw materials we purchase are also dependent upon sufficient supplies of quality water for their vineyards and fields. If water available to our operations or the operations of our suppliers becomes scarce or the quality of that water deteriorates, we may incur increased production costs or face manufacturing constraints. In addition, water purification and waste treatment infrastructure limitations could increase costs or constrain operation of our production facilities and vineyards. A substantial reduction in water supplies could result in material losses of grape crops and vines or other crops, such as barley or hops, which could lead to a shortage of our product supply. 12


  • Page 23

    We have substantial brewery operations in the country of Mexico, brewery operations in the states of California, Texas, Virginia and Florida, and we currently have substantial wine operations in the state of California as well. In the past, California had endured an extended period of drought and instituted restrictions on water usage. A recurrence of severe drought conditions in California could have an adverse effect upon those operations, which effect could become more significant depending upon actual future drought conditions. Our Nava Brewery and glass plant receive water originating from a mountain aquifer. Our Obregon Brewery receives its allocation of water originating from an aquifer and we expect our Mexicali Brewery will receive an allocation of water originating from an aquifer. Although we anticipate our operations will have adequate sources of water to support their on-going requirements, there is no guarantee that the sources of water, methods of water delivery, or water requirements will not change materially in the future. Our breweries, the glass plant, our wineries and our distilleries use a large volume of agricultural and other raw materials to produce their products. These include corn starch and sugars, malt, hops, fruits, yeast and water for our breweries; soda ash and silica sand for the glass plant; grapes and water for our wineries; and grain and water for our distilleries. Our breweries, wineries and distilleries all use large amounts of various packaging materials, including glass, aluminum, cardboard and other paper products. Our production facilities also use electricity, natural gas and diesel fuel in their operations. Certain raw materials and packaging materials are purchased under contracts of varying maturities. The supply and price of raw materials, packaging materials and energy can be affected by many factors beyond our control, including market demand, global geopolitical events (especially as to their impact on crude oil prices), droughts and other weather conditions or natural or man-made events, economic factors affecting growth decisions, inflation, plant diseases and theft. Our breweries, wineries and distilleries are also dependent upon an adequate supply of glass bottles. Glass bottle costs are one of our largest components of cost of product sold. We currently have a small number of suppliers of glass bottles for our Mexican beer brands. In the U.S., glass bottles have only a small number of producers. Currently, one producer supplies most of our glass container requirements for our U.S. wine and spirits operations and two producers supply our glass bottles for our craft beer. To the extent any of the foregoing factors increases the costs of our finished products or lead to a shortage of our product supply, we could experience a material adverse effect on our business, liquidity, financial condition and/or results of operations. Reliance on wholesale distributors, major retailers and government agencies Local market structures and distribution channels vary worldwide. Within our primary market in the U.S., we offer a range of beverage alcohol products across the beer, wine and spirits categories, with separate distribution networks utilized for our beer portfolio and our wine and spirits portfolio. In the U.S., we sell our products principally to wholesalers for resale to retail outlets and directly to government agencies, and we have entered into exclusive arrangements with certain wholesalers that generate a large portion of our U.S. wine and spirits net sales. Wholesalers and retailers of our products offer products which compete directly with our products for retail shelf space, promotional support and consumer purchases, and wholesalers or retailers may give higher priority to products of our competitors. The replacement or poor performance of our major wholesalers, retailers or government agencies could result in temporary or longer-term sales disruptions or could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Reliance upon complex information systems and third party global networks, cyber-attacks, and design and implementation of our new global enterprise resource planning system (“ERP”) We depend on information technology to enable us to operate efficiently and interface with customers and suppliers, as well as maintain financial accuracy and efficiency and effect accurate and timely governmental reporting. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, the loss of or damage to intellectual property through security breach, or penalties associated with the failure to timely file governmental reports. We recognize that many groups on a world-wide basis have 13


  • Page 24

    experienced increases in security breaches, cyber-attacks, and other hacking activities such as denial of service, malware, and ransomware. As with all large information technology systems, our systems could be penetrated by increasingly sophisticated outside parties intent on extracting confidential or proprietary information, corrupting our information, disrupting our business processes, or engaging in the unauthorized use of strategic information about us or our employees, customers or consumers. Such unauthorized access could disrupt our operations and could result in the loss of assets or revenues, litigation, remediation costs, damage to our reputation, or the failure by us to retain or attract customers following such an event. We have outsourced various functions to third-party service providers and may outsource other functions in the future. We rely on those third-party service providers to provide services on a timely and effective basis. However, we do not ultimately control their performance. Their failure to perform as expected or as required by contract could result in significant disruptions and costs to our operations. We are in the process of a multi-year implementation of a new ERP system which we intend to replace our existing operating and financial systems in fiscal 2020 and 2021. We are designing the ERP system to accurately maintain our financial records, enhance operational functionality and provide timely information to our management team related to the operation of the business. We expect the implementation process will require the investment of significant personnel and financial resources. Companies which implement new ERP systems may experience delays, increased costs and other difficulties. If we are not successful in designing and implementing our ERP system as planned or if it does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected, our ability to assess those controls adequately could be delayed, or we may not be able to operate our business. To the extent any of the foregoing factors result in significant disruptions and costs to our operations, or reduce the effectiveness of our internal control over financial reporting, we could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Contamination and degradation of product quality from diseases, pests and weather conditions Our success depends upon the positive image that consumers have of our brands and of the safety and quality of our products. Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for our brands, could adversely affect their sales. Various diseases, pests, fungi, viruses, drought, frosts and certain other weather conditions could affect the quality and quantity of barley, hops, grapes and other agricultural raw materials available, decreasing the supply and quality of our products. We cannot guarantee that our grape suppliers or our suppliers of other agricultural raw materials will succeed in preventing contamination in existing vineyards or fields or that we will succeed in preventing contamination in our existing vineyards or future vineyards we may acquire. Future government restrictions regarding the use of certain materials used in growing grapes or other agricultural raw materials may increase vineyard costs and/or reduce production of grapes or other crops. It is also possible that a supplier may not provide materials or product components which meet our required standards or may falsify documentation associated with the fulfillment of those requirements. Product contamination or tampering or the failure to maintain our standards for product quality, safety and integrity, including with respect to raw materials, naturally occurring compounds, packaging materials or product components obtained from suppliers, may also reduce demand for our products or cause production and delivery disruptions. Contaminants or other defects in raw materials, packaging materials or product components purchased from third parties and used in the production of our beer, wine or spirits products or defects in the fermentation or distillation process could lead to low beverage quality as well as illness among, or injury to, consumers of our products and may result in reduced sales of the affected brand or all our brands. If any of our products become unsafe or unfit for consumption, are misbranded, or cause injury, we may have to engage in a product recall and/or be subject to liability and incur additional costs. A widespread product recall, multiple product recalls, or a significant product liability judgment could cause our products to be unavailable for a period, which could further reduce consumer demand and brand equity. 14


  • Page 25

    Climate change and environmental regulatory compliance Our business depends upon agricultural activity and natural resources. There has been much public discussion related to concerns that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Severe weather events, such as drought or flooding in California or a prolonged cold winter in New York, and climate change may negatively affect agricultural productivity in the regions from which we presently source our various agricultural raw materials. Decreased availability of our raw materials may increase the cost of goods for our products. Severe weather events or changes in the frequency or intensity of weather events can also disrupt our supply chain, which may affect production operations, insurance cost and coverage, as well as delivery of our products to wholesalers, retailers and consumers. Natural disasters such as floods and earthquakes may also negatively impact the ability of consumers to purchase our products. We may experience significant future increases in the costs associated with environmental regulatory compliance, including fees, licenses, and the cost of capital improvements for our operating facilities to meet environmental regulatory requirements. In addition, we may be party to various environmental remediation obligations arising in the normal course of our business or relating to historical activities of businesses we acquire. Due to regulatory complexities, uncertainties inherent in litigation and the risk of unidentified contaminants in our current and former properties, the potential exists for remediation, liability and indemnification costs to differ materially from the costs that we have estimated. We may incur costs associated with environmental compliance arising from events we cannot control, such as unusually severe floods, hurricanes, earthquakes or fires. We cannot assure you that our costs in relation to these matters will not exceed our projections or otherwise have a material adverse effect upon our business, liquidity, financial condition or results of operations. Cannabis is currently illegal under U.S. federal law and in other jurisdictions; we do not control Canopy’s business or operations The ability of Canopy to achieve its business objectives is contingent, in part, upon the legality of the cannabis industry, Canopy’s compliance with regulatory requirements enacted by various governmental authorities, and Canopy obtaining all regulatory approvals, where necessary, for the production and sale of its products. The laws and regulations governing medical and recreational cannabis are still developing, including in ways that we may not foresee. Although the Agriculture Improvement Act of 2018 has taken hemp and hemp derived cannabinoids out of the most restrictive class of controlled substances, marijuana is a schedule-1 controlled substance in the U.S. and is currently illegal under U.S. federal law. Even in those U.S. states in which the recreational use of marijuana has been legalized, its use remains a violation of U.S. federal law. Since U.S. federal laws criminalizing the use of marijuana preempt state laws that legalize its use, continuation of U.S. federal law in its current state regarding marijuana would likely limit the expansion of Canopy’s business into the U.S. Similar issues of illegality apply in other countries. Any amendment to or replacement of existing laws to make them more onerous, or delays in amending or replacing existing laws to liberalize the legal possession and use of cannabis, or delays in obtaining, or the failure to obtain, any necessary regulatory approvals may significantly delay or impact negatively Canopy’s markets, products and sales initiatives and could have a material adverse effect on Canopy’s business, liquidity, financial condition and/or results of operations. Were that to occur, we may not be able to recover the value of our investments in Canopy. We have the right to nominate four members of the Canopy board of directors. While we do not control Canopy’s business or operations, we do rely on Canopy’s internal controls and procedures for operation of that business. Nevertheless, our financing arrangements require us to certify, among other things, that to our knowledge (i) Canopy is properly licensed and operating in accordance with Canadian laws in all material respects; (ii) Canopy does not knowingly or intentionally purchase, manufacture, distribute, import and/or sell marijuana or any other controlled substance in or from the United States of America or any other jurisdiction, in each case, where such purchase, manufacture, distribution, importation or sale of marijuana or such other controlled substance is illegal, except in compliance with all applicable Federal, state, local or foreign laws, rules and regulations; and (iii) Canopy does not knowingly or intentionally partner with, invest in, or distribute marijuana or any other controlled substance to any third-party that knowingly or intentionally purchases, sells, manufactures, or distributes marijuana or any other controlled substance in the United States of America or any other jurisdiction, in each case, 15


  • Page 26

    where such purchase, sale, manufacture or distribution of marijuana or such other controlled substance is illegal, except in compliance with all applicable Federal, state, local or foreign laws, rules and regulations. Were we to know that Canopy was knowingly or intentionally violating any of these applicable laws, we would be unable to make the required certification under our financing arrangements, which could lead to a default under those financing arrangements. Strategic Risks Competition We are in a highly competitive industry and our sales could be negatively affected by numerous factors including: our inability to maintain or increase prices; new entrants in our market or categories; the decision of wholesalers, retailers or consumers to purchase competitors’ products instead of ours; or a general decline in beverage alcohol consumption due to consumer dietary preference changes or consumers substituting legalized marijuana or other similar products in lieu of beverage alcohol. Sales could also be affected by pricing, purchasing, financing, operational, advertising or promotional decisions made by wholesalers, state and other local agencies, and retailers which could affect their supply of, or consumer demand for, our products. We could also experience higher than expected selling, general and administrative expenses if we find it necessary to increase the number of our personnel or our advertising or marketing expenditures to maintain our competitive position or for other reasons. We cannot guarantee that we will be able to increase our prices to pass along to our customers any increased costs we incur. Potential decline in the consumption of products we sell; dependence on sales of our Mexican beer brands Our business depends upon consumers’ consumption of our beer, wine and spirits brands, and sales of our Mexican beer brands in the U.S. are a significant portion of our business. Accordingly, a decline in the growth rate, amount or profitability of our sales of the Mexican beer brands in the U.S. could adversely affect our business. Further, consumer preferences and tastes may shift due to, among other reasons, changing taste preferences, demographics or perceived value. Consequently, any material shift in consumer preferences and taste in our major markets away from our beer, wine and spirits brands, and our Mexican beer brands in particular, from the categories in which they compete could have a negative impact on our business, liquidity, financial condition and/or results of operations. Consumer preferences may shift due to a variety of factors, including changes in demographic or social trends, public health policies, and changes in leisure, dining and beverage consumption patterns. A limited or general decline in consumption in one or more of our product categories could occur in the future due to a variety of factors, including: a general decline in economic or geopolitical conditions; concern about the health consequences of consuming beverage alcohol products and about drinking and driving; a general decline in the consumption of beverage alcohol products in on-premise establishments, such as may result from stricter laws relating to driving while under the influence of alcohol; the increased activity of anti-alcohol groups; increased federal, state, provincial and foreign excise or other taxes on beverage alcohol products and possible restrictions on beverage alcohol advertising and marketing; increased regulation placing restrictions on the purchase or consumption of beverage alcohol products or increasing prices due to the imposition of duties or excise tax or changes to international trade agreements or tariffs; inflation; and wars, pandemics, weather and natural or man-made disasters. 16


  • Page 27

    Acquisition, divestiture, investment, and new product development strategies From time to time, we acquire businesses, assets or securities of companies that we believe will provide a strategic fit with our business. We integrate acquired businesses with our existing operations; our overall internal control over financial reporting processes; and our financial, operations and information systems. If the financial performance of our business, as supplemented by the assets and businesses acquired, does not meet our expectations, it may make it more difficult for us to service our debt obligations and our results of operations may fail to meet market expectations. We may not effectively assimilate the business or product offerings of acquired companies into our business or within the anticipated costs or timeframes, retain key customers and suppliers or key employees of acquired businesses, or successfully implement our business plan for the combined business. In addition, our final determinations and appraisals of the estimated fair value of assets acquired and liabilities assumed in our acquisitions may vary materially from earlier estimates and we may fail to realize fully anticipated cost savings, growth opportunities or other potential synergies. We cannot assure you that the fair value of acquired businesses or investments will remain constant. We may also divest ourselves of businesses, assets or securities of companies that we believe no longer provide a strategic fit with our business. We may provide various indemnifications in connection with the divestiture of businesses or assets. Divestitures of portions of our business may also result in costs stranded in our remaining business. Delays in developing or implementing plans to address such costs could delay or prevent the accomplishment of our financial objectives. We have also acquired or retained ownership interests in companies which we do not control, such as our joint venture to operate a glass plant adjacent to our Nava Brewery, our interest in Canopy, and investments made through our corporate ventures capital function. Our joint venture partners or the other parties that hold the remaining ownership interests in companies which we do not control may at any time have economic, business or legal interests or goals that are inconsistent with our goals or the goals of the joint ventures or those companies. Our joint venture arrangements and the arrangements through which we acquired or hold our other equity or membership interests may require us, among other matters, to pay certain costs, to make capital investments, to fulfill alone our joint venture partners’ obligations, or to purchase other parties’ interests. We recently increased our investment in Canopy. While we will not develop, distribute, manufacture or sell cannabis products in the U.S., or anywhere else in the world, unless it is legally permissible to do so at all governmental levels in the particular jurisdiction, this investment could affect consumer perception of our existing brands and our reputation with various constituencies. In addition, our continued success depends, in part, on our ability to develop new products. The launch and ongoing success of new products are inherently uncertain, especially with respect to consumer appeal. The launch of a new product can give rise to a variety of costs and an unsuccessful launch, among other things, can affect consumer perception of existing brands and our reputation. Unsuccessful implementation or short-lived popularity of our product innovations may result in inventory write-offs and other costs. We cannot assure you that we will realize the expected benefits of acquisitions, divestitures or investments. We also cannot assure you that our acquisitions, investments or joint ventures will be profitable or that forecasts regarding acquisition, divestiture or investment activities will be accurate. Our failure to adequately manage the risks associated with acquisitions or divestitures, or the failure of an entity in which we have an equity or membership interest, could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Sale of a portion of our wine and spirits business As previously announced, we entered into a definitive agreement to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices and facilities. The divestiture of this portion of our business will enable us to focus on our higher-margin, higher-growth wine and spirits brands. The Wine and Spirits Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approval, and we cannot guarantee the transaction will 17


  • Page 28

    occur on the terms, conditions or timetable that we currently anticipate. We intend to use the net proceeds from this transaction primarily to reduce our outstanding borrowings. A delay in completing this transaction, or the failure to complete this transaction, could delay the accomplishment of our strategic and financial objectives. Moreover, the Wine and Spirits Transaction will reduce the diversification of our portfolio. We may not fully realize the expected benefits of a portfolio of higher-end wine and spirits brands. Our Canopy investments are dependent upon an emerging market and legal sales of cannabis products The legal cannabis market is an emerging market. The legislative framework pertaining to the Canadian cannabis market, as well as cannabis markets in other countries, is uncertain. The success of the Canopy transactions will depend on, among other things, the ability of Canopy to create a strong platform for us to operate successfully in the cannabis market space. There is no assurance a robust cannabis consumer market will develop consistent with our expectations or that consumers will purchase any Canopy products. A failure in the demand for Canopy’s products to materialize as a result of competition, consumer desire, competition from legal and illegal market entrants or other products, or other factors could have a material adverse effect on Canopy’s business, liquidity, financial condition and/or results of operations. Were that to occur, we may have to write down the value of our investments in Canopy. The changing legal landscape and the lack of consumer market data makes it difficult to predict the pace at which the cannabis market may grow, if at all, and the products that consumers will purchase in the cannabis marketplace. For example, the Canadian Cannabis Act prohibits testimonials, lifestyle branding and packaging that is appealing to youth. The restrictions on advertising, marketing and the use of logos and brand names could have a material adverse effect on Canopy’s business, liquidity, financial condition and/or results of operations, and our investment in Canopy. Additionally, Canopy must rely on its own market research to forecast sales as detailed forecasts may not be fully available at this early stage in the cannabis industry in Canada and globally. Market research relating to the adult-use recreational legal cannabis industry is in its early stages and, as such, trends can only be forecasted. Dependence upon trademarks and proprietary rights, failure to protect our intellectual property rights Our future success depends significantly on our ability to protect our current and future brands and products and to defend our intellectual property rights. We have been granted numerous trademark registrations covering our brands and products and have filed, and expect to continue to file, trademark applications seeking to protect newly- developed brands and products. We cannot be sure that trademark registrations will be issued with respect to any of our trademark applications. We could also, by omission, fail to timely renew or protect a trademark and our competitors could challenge, invalidate or circumvent any existing or future trademarks issued to, or licensed by, us. Financial Risks Indebtedness We have incurred indebtedness to finance investments and acquisitions, fund beer operations expansion and construction activities and repurchase shares of our common stock. In the future, we may continue to incur additional indebtedness to finance investments and acquisitions, repurchase shares of our stock and fund other general corporate purposes, including beer operations expansion and construction activities. We cannot assure you that our business will generate sufficient cash flow from operations to meet all our debt service requirements, pay dividends, repurchase shares of our common stock, and fund our general corporate and capital requirements. 18


  • Page 29

    Our current and future debt service obligations and covenants could have important consequences. These consequences include, or may include, the following: our ability to obtain financing for future working capital needs or investments/acquisitions or other purposes may be limited; our funds available for operations, expansions and construction, dividends or other distributions, or stock repurchases may be reduced because we dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our indebtedness; our ability to conduct our business could be limited by restrictive covenants; and our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, thus, our ability to withstand competitive pressures may be limited. Additionally, any failure to meet required payments on our debt, or failure to comply with any covenants in the instruments governing our debt, could result in an event of default under the terms of those instruments and a downgrade to our credit ratings. A downgrade in our credit ratings would increase our borrowing costs and could affect our ability to issue commercial paper. Certain of our debt facilities also contain change of control provisions which, if triggered, may result in an acceleration of our obligation to repay the debt. If we fail to comply with the obligations contained in our senior credit facility, our existing or future indentures, or other loan agreements, we could be in default under such debt facilities or agreements. In the event of a default, the holders of our debt could elect to declare all amounts outstanding under such instrument to be due and payable. A default could also require the immediate repayment of outstanding obligations under other debt facilities or agreements that contain cross-acceleration or cross-default provisions. If that were to occur, we might not have available funds to satisfy such repayment obligations. Intangible assets, such as goodwill and trademarks We have a significant amount of intangible assets such as goodwill and trademarks and may acquire more intangible assets in the future. Intangible assets are subject to a periodic impairment evaluation under applicable accounting standards. The write-down of any of these intangible assets could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Changes to tax laws, fluctuations in our effective tax rate, accounting for tax positions and the resolution of tax disputes, and changes to accounting standards, elections or assertions The U.S. federal budget and individual state, provincial, local municipal budget deficits, or deficits in other governmental entities, could result in increased taxes on our products, business, customers or consumers. Various proposals to increase taxes on beverage alcohol products have been made at the federal and state levels or at other governmental bodies in recent years. Federal, state, provincial, local or foreign governmental entities may consider increasing taxes upon beverage alcohol products as they explore available alternatives for raising funds. On December 22, 2017, the TCJ Act was signed into law in the United States. The changes in the TCJ Act are broad and complex and we continue to examine the impact the TCJ Act may have on our business and financial results. In addition, significant judgment is required to determine our effective tax rate and evaluate our tax positions. Our provision for income taxes includes a provision for uncertain tax positions. Fluctuations in federal, state, local and foreign taxes or a change to uncertain tax positions, including related interest and penalties, may impact our effective tax rate and our financial results. When tax matters arise, several years may elapse before such matters are audited and finally resolved. Unfavorable resolution of any tax matter could increase our effective tax rate and resolution of a tax issue may require the use of cash in the year of resolution. Additional U.S. tax changes or in how international corporations are taxed, including changes in how existing tax laws are interpreted or enforced, or changes to accounting standards, elections or assertions could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. 19


  • Page 30

    Securities measured at fair value The value of the warrants and convertible debt we hold in Canopy through our subsidiaries is subject to the volatility of the market price of Canopy’s common stock. This volatility subjects our financial statements to volatility. The market price of Canopy’s common stock has experienced significant volatility, and that volatility may continue in the future and may also be subject to wide fluctuations in response to many factors beyond the control of Canopy, or of us. These factors include, but are not limited to: actual or anticipated fluctuations in Canopy’s reported results of operations; recommendations by securities analysts; changes in the market valuations of companies in the industry in which Canopy operates; announcement of developments and material events by Canopy or its competitors; fluctuations in the costs of vital production materials and services; addition or departure of Canopy executive officers or other key personnel; news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in Canopy’s industry or target markets; regulatory changes affecting the cannabis industry generally and Canopy’s business and operations; and administrative obligations associated with Health Canada requirements and compliance with all associated rules and regulations including, but not limited to, the Canadian Cannabis Act. We recently agreed to modify the terms of certain warrants we hold in Canopy which, if modified, would among other things extend the expiry of those warrants and extend the time period through which the value of those warrants and our financial statements are subject to the volatility of the market price of Canopy’s common stock. Canopy’s Corporate Governance Canopy’s business is subject to evolving corporate governance and public disclosure regulations that may from time to time increase both Canopy’s compliance costs and the risk of its non-compliance. These include changing rules and regulations promulgated by a number of governmental and self-regulated organizations, including, but not limited to, the Canadian Securities Administrators, the TSX, the International Accounting Standards Board, the SEC and the NYSE. These rules continue to evolve in scope and complexity creating new requirements for Canopy. Canopy is currently exempt from certain NYSE corporate governance requirements because it is a foreign private issuer listed on the NYSE and registered with the SEC and is subject to Canadian requirements. When Canopy registered with the SEC, it did not need to test its internal control procedures to satisfy the requirements pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) that require management of Canopy to perform an annual assessment of the effectiveness of Canopy’s internal control over financial reporting and its registered public accounting firm to provide an attestation report as to the effectiveness of such controls. The future application of SOX to Canopy will require management of Canopy to perform an annual assessment of Canopy’s internal control over financial reporting and its registered public accounting firm to conduct an independent assessment of the effectiveness of such controls. Canopy has disclosed a material weakness in internal controls over financial reporting. Canopy may not be able to remediate the material weakness timely. Also, Canopy’s internal controls may not be adequate, or Canopy may not be able to maintain adequate internal controls as required by SOX. Canopy may not be able to maintain effective internal controls over financial reporting on an ongoing basis if standards are modified, supplemented or amended from time to time. If Canopy does not satisfy SOX requirements on an ongoing and timely basis, investors could lose confidence in the reliability of its financial statements, which could harm Canopy’s business and have a negative impact on the trading price or market value of Canopy securities. Other Risks Damage to our reputation The success of our brands depends upon the positive image that consumers have of those brands and maintaining a good reputation is critical to selling our branded products. Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for 20


  • Page 31

    our brands, could adversely affect their sales and our reputation. Our reputation could also be impacted negatively by public perception, adverse publicity (whether or not valid), negative comments in social media, or our responses relating to: a perceived failure to maintain high ethical, social and environmental standards for all our operations and activities; a perceived failure to address concerns relating to the quality, safety or integrity of our products; allegations that we, or persons associated with us or formerly associated with us, have violated applicable laws or regulations, including but not limited to those related to safety, employment, discrimination, harassment, whistle-blowing, privacy, or cyber-security; our environmental impact, including use of agricultural materials, packaging, water and energy use, and waste management; or efforts that are perceived as insufficient to promote the responsible use of alcohol or cannabis. Failure to comply with federal, state, or local laws and regulations, maintain an effective system of internal controls, provide accurate and timely financial statement information, or protect our information systems against service interruptions, misappropriation of data or breaches of security, could also hurt our reputation. Damage to our reputation or loss of consumer confidence in our products for any of these or other reasons could result in decreased demand for our products and could have a material adverse effect on our business, liquidity, financial condition and/or results of operations, as well as require additional resources to rebuild our reputation, competitive position and brand equity. Class action or other litigation relating to abuse of our products, the misuse of our products, product liability, or marketing or sales practices There has been public attention directed at the beverage alcohol industry, which we believe is due to concern over problems related to harmful use of alcohol, including drinking and driving, underage drinking and health consequences from the misuse of alcohol. We could be exposed to lawsuits relating to product liability or marketing or sales practices. Adverse developments in lawsuits concerning these types of matters or a significant decline in the social acceptability of beverage alcohol products that may result from lawsuits could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Control by the Sands Family Our Class B Common Stock is principally held by members of the Sands family, either directly or through entities controlled by members of the Sands family. Holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to 10 votes per share. Holders of Class 1 Common Stock generally do not have voting rights. The stock ownership of the Sands family and entities controlled by members of the Sands family represents a majority of the combined voting power of all classes of our common stock as of April 17, 2019, voting as a single class. Consequently, the Sands family has the power to elect a majority of our directors and approve actions requiring the approval of the stockholders of the Company voting as a single class. Item 1B. Unresolved Staff Comments. Not Applicable. 21


  • Page 32

    Item 2. Properties. We operate breweries, wineries, distilling plants and bottling plants, many of which include warehousing and distribution facilities on the premises, and through a joint venture, we operate a glass production plant. In addition to our properties described below, certain of our businesses maintain office space for sales and similar activities and offsite warehouse and distribution facilities in a variety of geographic locations. Our corporate headquarters are located in leased offices in Victor, New York. Our segments also maintain leased office spaces in other locations in the U.S. and internationally. We believe that our facilities, taken as a whole, are in good condition and working order. Within the Wine and Spirits segment, we have adequate capacity to meet our needs for the foreseeable future. Within the Beer segment, we have adequate capacity to meet our current needs and we have undertaken activities to increase our production capacity to address our anticipated future needs. As of February 28, 2019, our properties include the following: Owned Leased Beer Segment Breweries U.S. 2 8 Mexico 2 Total breweries 4 8 Glass production plant (1) Mexico 1 Warehouse, distribution and other production facilities U.S. 32 Mexico 1 5 Total warehouse, distribution and other production facilities 1 37 Total Beer Segment 6 45 Wine and Spirits Segment Wineries U.S. California 14 2 New York 1 Washington 1 New Zealand 3 Italy 1 5 Total wineries 20 7 Distilleries U.S. 1 1 Canada 1 Total distilleries 2 1 Warehouse, distribution and other production facilities U.S. 6 Canada 1 Italy 1 8 Total warehouse, distribution and other production facilities 1 15 Total Wine and Spirits Segment 23 23 (1) The glass production plant in Nava, Coahuila, Mexico is owned and operated by an equally-owned joint venture with Owens-Illinois and is located adjacent to our Nava Brewery. 22


  • Page 33

    Within our Wine and Spirits segment, as of February 28, 2019, we owned, leased or had interests in approximately 12,500 acres of vineyards in California (U.S.), 6,800 acres of vineyards in New Zealand and 1,200 acres of vineyards in Italy. As of February 28, 2019, our principal facilities, all of which are owned, consist of: the Nava Brewery in Nava, Coahuila, Mexico; the Obregon Brewery in Obregon, Sonora, Mexico; the glass production plant in Nava, Coahuila, Mexico; two wineries in California: the Woodbridge Winery in Acampo and the Mission Bell winery in Madera; the Canandaigua winery in Canandaigua, New York; and the distillery in Lethbridge, Alberta, Canada. In April 2019, we entered into a definitive agreement to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices and facilities. The transaction will include two of our principal Wine and Spirits facilities: the Canandaigua winery and the Mission Bell winery. For further information about this transaction, refer to MD&A and Note 23 of the Notes to the Financial Statements. Item 3. Legal Proceedings. In the ordinary course of their business, the Company and its subsidiaries are subject to lawsuits, arbitrations, claims and other legal proceedings in connection with their business. Some of the legal actions include claims for substantial or unspecified compensatory and/or punitive damages. A substantial adverse judgment or other unfavorable resolution of these matters could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. Management believes that the Company has adequate legal defenses with respect to the legal proceedings to which it is a defendant or respondent and that the outcome of these pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, the Company is unable to predict the outcome of these matters. Regulatory Matters – The Company and its subsidiaries are in discussions with various governmental agencies concerning matters raised during regulatory examinations or otherwise subject to such agencies’ inquiry. These matters could result in censures, fines or other sanctions. Management believes the outcome of any pending regulatory matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. However, the Company is unable to predict the outcome of these matters. Item 4. Mine Safety Disclosures. Not Applicable. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our Class A Common Stock and Class B Common Stock trade on the New York Stock Exchange® (“NYSE”) under the symbols STZ and STZ.B, respectively. There is no public trading market for our Class 1 Common Stock. At April 17, 2019, the number of holders of record of our Class A Common Stock, Class B Common Stock and Class 1 Common Stock were 531, 100 and 11, respectively. 23


  • Page 34

    Item 6. Selected Financial Data. The following selected financial data should be read in conjunction with MD&A and our consolidated financial statements and notes thereto under Item 8 of this Annual Report on Form 10-K (the “Financial Statements”). Effective March 1, 2018, we adopted the FASB amended guidance regarding the recognition of revenue from contracts with customers using the retrospective application method. Accordingly, we have restated sales, net sales, gross profit, operating income, income before income taxes, provision for income taxes, net income, net income attributable to CBI and net income per common share attributable to CBI, for the years ended February 28, 2018, and February 28, 2017. For additional information, refer to Note 1 of the Notes to the Financial Statements. For the Years Ended February 28, February 28, February 28, February 29, February 28, 2019 2018 2017 (1) 2016 2015 (in millions, except per share data) Sales $ 8,884.3 $ 8,322.1 $ 8,051.2 $ 7,223.8 $ 6,672.1 Excise taxes (768.3) (741.8) (730.1) (675.4) (644.1) Net sales 8,116.0 7,580.3 7,321.1 6,548.4 6,028.0 Cost of product sold (4,035.7) (3,767.8) (3,802.1) (3,606.1) (3,449.4) Gross profit 4,080.3 3,812.5 3,519.0 2,942.3 2,578.6 Selling, general and administrative expenses (2) (3) (1,668.1) (1,532.7) (1,392.4) (1,177.2) (1,078.4) Gain on sale of business — — 262.4 — — Operating income 2,412.2 2,279.8 2,389.0 1,765.1 1,500.2 Income from unconsolidated investments (4) 2,101.6 487.2 27.3 51.1 21.5 Interest expense (367.1) (332.0) (333.3) (313.9) (337.7) Loss on extinguishment of debt (5) (1.7) (97.0) — (1.1) (4.4) Income before income taxes 4,145.0 2,338.0 2,083.0 1,501.2 1,179.6 Provision for income taxes (6) (685.9) (22.7) (550.3) (440.6) (343.4) Net income 3,459.1 2,315.3 1,532.7 1,060.6 836.2 Net (income) loss attributable to noncontrolling interests (23.2) (11.9) (4.1) (5.7) 3.1 Net income attributable to CBI $ 3,435.9 $ 2,303.4 $ 1,528.6 $ 1,054.9 $ 839.3 Net income per common share attributable to CBI: Basic – Class A Common Stock $ 18.24 $ 11.96 $ 7.76 $ 5.42 $ 4.40 Basic – Class B Convertible Common Stock $ 16.57 $ 10.86 $ 7.04 $ 4.92 $ 4.00 Diluted – Class A Common Stock $ 17.57 $ 11.47 $ 7.49 $ 5.18 $ 4.17 Diluted – Class B Convertible Common Stock $ 16.21 $ 10.59 $ 6.90 $ 4.79 $ 3.83 Cash dividends declared per common share: Class A Common Stock $ 2.96 $ 2.08 $ 1.60 $ 1.24 $ — Class B Convertible Common Stock $ 2.68 $ 1.88 $ 1.44 $ 1.12 $ — Total assets $ 29,231.5 $ 20,538.7 $ 18,602.4 $ 16,965.0 $ 15,093.0 Long-term debt, including current maturities $ 12,825.0 $ 9,439.9 $ 8,631.6 $ 7,672.9 $ 7,244.1 24


  • Page 35

    (1) In December 2016, we completed the Canadian Divestiture and recognized a gain on sale of business (refer to Note 2 of the Notes to the Financial Statements for additional discussion). (2) Includes impairment of intangible assets of $108.0 million, $86.8 million and $46.0 million for the years ended February 28, 2019, February 28, 2018, and February 28, 2017, respectively (refer to Note 7 of the Notes to the Financial Statements for additional discussion). (3) Includes a net gain in connection with the sale of our Accolade Wine Investment of $99.8 million for the year ended February 28, 2019 (refer to Note 2 of the Notes to the Financial Statements for additional discussion). (4) Includes unrealized net gain from the changes in fair value of the Canopy securities measured at fair value of $1,971.2 million and $464.3 million for the years ended February 28, 2019, and February 28, 2018, respectively (refer to Note 7 of the Notes to the Financial Statements for additional discussion). (5) Consists of a make-whole payment of $73.6 million in connection with the early redemption of our April 2012 senior notes and the write-off of debt issuance costs of $23.4 million in connection with prior-to-maturity repayments of various debt obligations for the year ended February 28, 2018 (refer to Note 12 of the Notes to the Financial Statements for additional discussion). (6) Includes a provisional net income tax benefit of $351.2 million for the year ended February 28, 2018, associated with the December 2017 enactment of the TCJ Act (refer to Note 13 of the Notes to the Financial Statements for additional discussion). Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction This MD&A, which should be read in conjunction with our Financial Statements, provides additional information on our businesses, current developments, financial condition, cash flows and results of operations. It is organized as follows: Overview. This section provides a general description of our business, which we believe is important in understanding the results of our operations, financial condition and potential future trends. Strategy. This section provides a description of our strategy and a discussion of recent developments, investments, acquisitions and divestitures. Results of operations. This section provides an analysis of our results of operations presented on a business segment basis. In addition, a brief description of transactions and other items that affect the comparability of the results is provided. Financial liquidity and capital resources. This section provides an analysis of our cash flows and our outstanding debt and commitments. Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund our ongoing operations and future commitments, as well as a discussion of other financing arrangements. Critical accounting estimates and policies. This section identifies those accounting policies that are considered important to our results of operations and financial condition, require significant judgment and involve significant management estimates. Our significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 1 of the Notes to the Financial Statements. Effective March 1, 2018, we adopted the FASB amended guidance regarding the recognition of revenue from contracts with customers using the retrospective application method. Accordingly, unless otherwise noted, we have restated net sales, gross profit, operating income, provision for income taxes and net income attributable to CBI for the years ended February 28, 2018, and February 28, 2017. For additional information, refer to Note 1 of the Notes to the Financial Statements. 25


  • Page 36

    Overview We are an international beverage alcohol company with a broad portfolio of consumer-preferred, high-end imported and craft beer brands, and higher-end wine and spirits brands. We are the third-largest producer and marketer of beer for the U.S. market and a leading, higher-end wine company in the U.S. market. We are the largest multi-category supplier (beer, wine and spirits) of beverage alcohol in the U.S., and a leading supplier of wine from New Zealand and Italy to North America. Our internal management financial reporting consists of two business divisions: (i) Beer and (ii) Wine and Spirits, and we report our operating results in three segments: (i) Beer, (ii) Wine and Spirits, and (iii) Corporate Operations and Other. In the Beer segment, our portfolio consists of high-end imported and craft beer brands. We have an exclusive perpetual brand license to import, market and sell in the U.S. our Mexican beer portfolio. In the Wine and Spirits segment, our portfolio includes higher-margin, higher-growth wine brands complemented by certain higher-end spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of executive management, corporate development, corporate finance, corporate growth and strategy, human resources, internal audit, investor relations, legal, public relations and information technology, as well as our investments in Canopy and those made through our corporate venture capital function. All costs included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are therefore not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in our chief operating decision maker’s evaluation of the operating income performance of the other reportable segments. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management, and the structure of our internal financial reporting. Strategy Our overall strategy is to drive industry-leading growth and shareholder value by building brands that people love when celebrating big moments or enjoying quiet ones. We position our portfolio to benefit from the consumer-led trend towards premiumization, which we believe will continue to result in faster growth rates in the higher-end of the beer, wine and spirits categories. We focus on developing our expertise in consumer insights and category management as well as our strong distributor network, which provides an effective route-to-market. Additionally, we leverage our scale across the total beverage alcohol market and our level of diversification hedges our portfolio risk. In addition to growing our existing business, we focus on targeted acquisitions of, and investments in, businesses that are higher-margin, higher-growth, consumer-led, have a low integration risk and/or fill a gap in our portfolio. We also strive to identify, meet and stay ahead of evolving consumer trends and market dynamics (see “Recent Developments” and “Investments, Acquisitions and Divestitures – Canopy Investments” below). We strive to strengthen our portfolio of higher-end beer, wine and spirits brands and differentiate ourselves through: leveraging our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio and to provide for cross promotional opportunities; strengthening relationships with wholesalers and retailers by providing consumer and beverage alcohol insights; investing in brand building and innovation activities; positioning ourselves for success with consumer-led products that identify, meet and stay ahead of evolving consumer trends and market dynamics; realizing operating efficiencies through expanding and enhancing production capabilities and maximizing asset utilization; and developing employees to enhance performance in the marketplace. Our business strategy for the Beer segment focuses on leading the high-end segment of the U.S. beer market and includes continued focus on growing our beer portfolio in the U.S. through expanding distribution for key 26


  • Page 37

    brands, as well as new product development and innovation within the existing portfolio of brands, and continued expansion, construction and optimization activities for our Mexico beer operations. Additionally, in an effort to more fully compete in growing sectors of the high-end segment of the U.S. beer market, we’ve made several acquisitions of high-quality, regional craft beer brands and leveraged our innovation capabilities to introduce new brands that align with consumer trends. In connection with our business strategy for the Beer segment, we have more than tripled the production capacity of our Nava Brewery since its June 2013 acquisition. In addition, construction of the Mexicali Brewery is progressing and we are continuing to invest to expand the Obregon Brewery, which was acquired in December 2016. Expansion, construction and optimization efforts continue under our previously-announced Mexico Beer Expansion Projects (as defined below in “Capital Expenditures”) to align with our anticipated future growth expectations (see “Capital Expenditures” below). Our business strategy for the Wine and Spirits segment is to build an industry-leading portfolio of higher- end wine and spirits brands. We are investing to meet the evolving needs of consumers; building brands through consumer insights, sensory expertise and innovation; and refreshing existing brands, as we continue to focus on moving our branded wine and spirits portfolio towards a higher-margin, higher-growth portfolio of brands. We dedicate a large share of our sales and marketing resources to our U.S. Focus Brands as they represent a majority of our U.S. wine and spirits revenue and profitability, and generally hold strong positions in their respective price categories. We focus our innovation and investment dollars on those brands within our portfolio which position us to benefit from the consumer-led trend towards premiumization. Additionally, in connection with the Wine and Spirits Transaction, we expect to optimize the value of our wine and spirits portfolio by driving increased focus on our higher-end priority brands to accelerate growth and improve overall operating margins. In markets where it is feasible, we entered into contractual arrangements to consolidate our U.S. distribution network in order to obtain dedicated distributor selling resources which focus on our U.S. wine and spirits portfolio to drive organic growth. This consolidated U.S. distribution network currently represents about 70% of our branded wine and spirits volume in the U.S. Throughout the terms of these contracts, we generally expect shipments on an annual basis to these distributors to essentially equal the distributors’ shipments to retailers. Marketing, sales and distribution of our products are managed on a geographic basis in order to fully leverage leading market positions. In addition, market dynamics and consumer trends vary across each of our markets. Within our primary market in the U.S., we offer a range of beverage alcohol products across the imported beer, craft beer, branded wine and spirits categories, with generally separate distribution networks utilized for (i) our beer portfolio and (ii) our wine and spirits portfolio. The environment for our products is competitive in each of our markets. Within our Corporate Operations and Other segment, we complemented our total beverage alcohol strategy in an adjacent category by making investments in Canopy, a world-leading, diversified cannabis company. These investments are consistent with our long-term strategy to identify, meet and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property and retailing. We remain committed to our long-term financial model of growing sales, expanding margins and increasing cash flow in order to achieve earnings per share growth, maintain our targeted leverage ratio and pay quarterly cash dividends. Recent Developments Wine and Spirits Transaction In April 2019, we entered into a definitive agreement to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices and facilities, for approximately $1.7 billion, subject to certain adjustments. The Wine and Spirits Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approval. We expect to use the net cash proceeds from this transaction primarily to reduce outstanding borrowings. We are in the process of 27


  • Page 38

    developing a plan to eliminate any remaining costs in the Wine and Spirits segment from the brands we are selling and expect to incur a restructuring charge for the first quarter of fiscal 2020. We expect the Wine and Spirits Transaction to close around the end of the first quarter of fiscal 2020. The Wine and Spirits Transaction is consistent with our strategic focus on higher-margin, higher-growth brands. We are selling approximately $1.3 billion in tangible and intangible assets, excluding goodwill, in connection with the Wine and Spirits Transaction. Selected financial information included in our results of operations for Fiscal 2019 for the portion of the wine and spirits business we expect to sell is as follows: Net Sales Gross Profit Marketing (in millions) Wine and Spirits segment results $ 1,106.7 $ 419.5 $ 30.5 Canopy Warrants Modification In April 2019, we agreed to modify the terms of the November 2018 Canopy Warrants and certain other rights. Modification of the November 2018 Canopy Warrants is subject to, among other things, approval by Canopy’s shareholders. These changes are a result of Canopy’s intention to acquire Acreage Holdings, Inc. upon U.S. Federal cannabis legalization, subject to certain conditions. We expect the New November 2018 Canopy Warrants to be accounted for at fair value. If Canopy shareholder approval is received, we expect the modifications to the November 2018 Canopy Warrants will result in a fair value adjustment related to the warrants. Additionally, we expect the fair value of the New November 2018 Canopy Warrants to be volatile in future periods. For additional information regarding the Canopy warrants modification, see Note 10 of the Notes to the Financial Statements. Investments, Acquisitions and Divestitures Corporate Operations and Other Segment Canopy Investments Our investments in Canopy, and the method of accounting for these investments, consist of the following: Date of Investment Purchase Method of Investment Acquired Price Accounting (in millions) Nov 2017 Common shares $ 130.1 Fair value / equity method (1) Nov 2017 Warrants 61.2 Fair value $ 191.3 June 2018 Convertible debt securities $ 150.5 Fair value Nov 2018 Common shares $ 2,740.3 Equity method Nov 2018 Warrants 1,146.8 Fair value (2) $ 3,887.1 28


  • Page 39

    We recognized an unrealized net gain from the changes in fair value of these investments accounted for at fair value in income from unconsolidated investments, as follows: Date of Investment Investment Fiscal 2019 Fiscal 2018 (in millions) Nov 2017 Common shares (1) $ 292.5 $ 272.3 Nov 2017 Warrants 465.5 192.0 June 2018 Convertible debt securities 55.5 — Nov 2018 Warrants 1,157.7 — $ 1,971.2 $ 464.3 (1) Accounted for at fair value from the date of investment in November 2017 through October 31, 2018. Accounted for under the equity method from November 1, 2018 (refer to Note 10 of the Financial Statements). (2) Includes $17.2 million of direct acquisition costs capitalized under the equity method cost accumulation model. Excludes $7.3 million of direct acquisition costs associated with the investment in warrants which are expensed as incurred in selling, general and administrative expenses. See “Financial Liquidity and Capital Resources – General” for a discussion of financing for this transaction. We expect the fair value of the Canopy investments accounted for at fair value to be volatile in future periods. Equity in earnings (losses) for our Canopy Equity Method Investment are reported in the Corporate Operations and Other segment and are expected to be volatile in future periods. Additionally, since November 1, 2018 we recognize equity in earnings (losses) for our Canopy Equity Method Investment on a two-month lag. Accordingly, we recognized our share of Canopy’s losses from November and December 2018, which was included in Canopy’s third quarter fiscal 2019 results, in our fourth quarter fiscal 2019 results. As of February 28, 2019, the conversion of Canopy equity securities held by its employees and/or held by other third parties would not have a significant effect on our share of Canopy’s reported earnings or losses. Additionally, under an amended and restated investor rights agreement, we have the option to purchase additional common shares of Canopy at the then-current price of the underlying equity security to allow us to maintain our relative ownership interest. As previously noted, these investments are consistent with our long-term strategy to identify, meet and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property and retailing. Beer Segment Four Corners Acquisition In July 2018, we acquired Four Corners, which primarily included the acquisition of operations, goodwill, property, plant and equipment, and trademarks. This acquisition included a portfolio of high-quality, dynamic and bicultural, Texas-based craft beers which further strengthened our position in the high-end segment of the U.S. beer market. The results of operations of Four Corners are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition. Funky Buddha Acquisition In August 2017, we acquired Funky Buddha, which primarily included the acquisition of operations, goodwill and trademarks. This acquisition included a portfolio of high-quality, Florida-based craft beers which further strengthened our position in the high-end segment of the U.S. beer market. The results of operations of Funky Buddha are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition. 29


  • Page 40

    Obregon Brewery Acquisition In December 2016, we acquired the Obregon Brewery, which primarily included the acquisition of operations, goodwill, property, plant and equipment and inventories. This acquisition provided us with immediate functioning brewery capacity to support our fast-growing, high-end Mexican beer portfolio and flexibility for future innovation initiatives. It also enabled us to become fully independent from an interim supply agreement with Modelo, which was terminated at the time of this acquisition. The results of operations of the Obregon Brewery are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition. Wine and Spirits Segment Schrader Cellars Acquisition In June 2017, we acquired Schrader Cellars, which primarily included the acquisition of goodwill, inventories, trademarks and certain grape supply contracts. This acquisition included a collection of highly-rated, limited-production fine wines which aligned with our strategic focus on higher-end wine and spirits brands and strengthened our position in the fine wine category. The results of operations of Schrader Cellars are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. Canadian Divestiture In December 2016, we sold our Canadian wine business, which included Canadian wine brands such as Jackson-Triggs and Inniskillin, wineries, vineyards, offices, facilities and Wine Rack retail stores, at a transaction value of C$1.03 billion, or $775.1 million. Accordingly, our consolidated results of operations include the results of operations of our Canadian wine business through the date of divestiture. We received cash proceeds of $570.3 million, net of outstanding debt and direct costs to sell. We will continue to export certain of our brands into the Canadian market, which remains our largest export market. This transaction is consistent with our strategic focus on higher-margin, higher-growth brands. We recognized a net gain on the sale of the business in the fourth quarter of fiscal 2017 of $262.4 million. Selected financial information included in our historical financial statements for Fiscal 2017 that are no longer part of our results after the Canadian Divestiture is as follows: Income Cash Flows Depreciation Before From and Operating Income Operating Net Sales Gross Profit Amortization Income Taxes Activities (in millions) Consolidated results (1) $ 311.2 $ 131.2 $ 9.1 $ 49.8 $ 46.6 $ 47.2 Wine and Spirits segment results (1) $ 311.2 $ 131.2 $ 9.1 $ 50.1 (1) Amounts have not been adjusted to reflect the adoption of the amended guidance for revenue recognition as the impact is not deemed material. Additionally, the Wine and Spirits segment results do not include the impact of comparable adjustments (see “Comparable Adjustments” below). Charles Smith Acquisition In October 2016, we acquired Charles Smith, which primarily included the acquisition of goodwill, trademarks, inventories and certain grape supply contracts. This acquisition included a collection of five super and ultra-premium, high-quality Washington State wine brands with strong consumer affinity and demand. The results of operations of Charles Smith are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. 30


  • Page 41

    High West Acquisition In October 2016, we acquired High West, which primarily included the acquisition of operations, goodwill, trademarks, inventories and property, plant and equipment. This acquisition included a portfolio of distinctive, award-winning, fast-growing and higher-end craft whiskeys and other select spirits. The results of operations of High West are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. Prisoner Acquisition In April 2016, we acquired Prisoner, which primarily included the acquisition of goodwill, inventories, trademarks and certain grape supply contracts. This acquisition, which included a portfolio of five higher-margin, fast-growing, super-luxury wine brands, aligned with our strategic focus on higher-end wine and spirits brands and strengthened our position in the super-luxury wine category. The results of operations of Prisoner are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. For additional information on these investments, acquisitions and divestitures, refer to Notes 2, 7 and 10 of the Notes to the Financial Statements. Results of Operations Financial Highlights References to organic throughout the following discussion exclude the impact of acquired brand activity in connection with our more significant acquisitions, consisting of Prisoner, High West and Charles Smith (wine and spirits), and divested brand activity in connection with the Canadian Divestiture (wine and spirits), as appropriate. Financial Highlights for Fiscal 2019: Our results of operations benefited primarily from continued improvements within the Beer segment, an unrealized net gain from the changes in fair value of our investments in Canopy and a net gain on the sale of the Accolade Wine Investment. Net sales increased 7% primarily due to an increase in Beer net sales driven predominantly by volume growth and a favorable impact from pricing within our Mexican beer portfolio. Operating income increased 6% largely due to the net sales volume growth and favorable impact from pricing within our Mexican beer portfolio. Operating income growth was tempered by planned increases in marketing spend and higher cost of product sold across both the Beer and Wine and Spirits segments. Net income attributable to CBI and diluted net income per common share attributable to CBI increased significantly primarily due to the factors discussed above. Comparable Adjustments Management excludes items that affect comparability from its evaluation of the results of each operating segment as these Comparable Adjustments are not reflective of core operations of the segments. Segment operating performance and segment management compensation are evaluated based on core segment operating income (loss). As such, the performance measures for incentive compensation purposes for segment management do not include the impact of these Comparable Adjustments. 31


  • Page 42

    As more fully described herein and in the related Notes to the Financial Statements, the Comparable Adjustments that impacted comparability in our segment results for each period are as follows: Fiscal 2019 Fiscal 2018 Fiscal 2017 (in millions) Cost of product sold Accelerated depreciation $ (8.9) $ — $ — Settlements of undesignated commodity derivative contracts (8.6) 2.3 23.4 Flow through of inventory step-up (4.9) (18.7) (20.1) Loss on inventory write-down (3.3) (19.1) — Net gain on undesignated commodity derivative contracts 1.8 7.4 16.3 Other losses (6.0) — (2.2) Total cost of product sold (29.9) (28.1) 17.4 Selling, general and administrative expenses Impairment of intangible assets (108.0) (86.8) (37.6) Net loss on foreign currency derivative contracts associated with acquisition of investment (32.6) — — Restructuring and other strategic business development costs (17.1) (14.0) (0.9) Deferred compensation (16.3) — — Transaction, integration and other acquisition-related costs (10.2) (8.1) (14.2) Loss on contract termination — (59.0) — Costs associated with the Canadian Divestiture and related activities — (3.2) (20.4) Other gains (losses) 10.1 10.5 (2.6) Total selling, general and administrative expenses (174.1) (160.6) (75.7) Gain on sale of business — — 262.4 Comparable Adjustments, Operating income (loss) $ (204.0) $ (188.7) $ 204.1 Income (loss) from unconsolidated investments $ 2,084.9 $ 452.6 $ (1.7) Cost of Product Sold Accelerated Depreciation We recognized accelerated depreciation for certain assets primarily in connection with our current multi- year implementation of a new ERP system which is intended to replace our existing operating and financial systems. Undesignated Commodity Derivative Contracts Net gain (loss) on undesignated commodity derivative contracts represents a net gain (loss) from the changes in fair value of undesignated commodity derivative contracts. The net gain (loss) is reported outside of segment operating results until such time that the underlying exposure is recognized in the segment operating results. At settlement, the net gain (loss) from the changes in fair value of the undesignated commodity derivative contracts is reported in the appropriate operating segment, allowing the results of our operating segments to reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility. Inventory Step-Up In connection with acquisitions, the allocation of purchase price in excess of book value for certain inventories on hand at the date of acquisition is referred to as inventory step-up. Inventory step-up represents an assumed manufacturing profit attributable to the acquired business prior to acquisition. 32


  • Page 43

    Loss on Inventory Write-Down We recognized a loss on the write-down of certain bulk wine inventory as a result of smoke damage sustained during the Fall 2017 California wildfires (Fiscal 2019 and Fiscal 2018). Selling, General and Administrative Expenses Impairment of Intangible Assets We recognized trademark impairment losses related to our Beer segment’s Ballast Point craft beer trademark asset (Fiscal 2019 and Fiscal 2018) and certain of our Wine and Spirits trademark assets associated with our decision to discontinue certain small-scale, low-margin U.S. brands (Fiscal 2017). See “Costs Associated with the Canadian Divestiture and Related Activities” below for information about an additional impairment of intangible assets recognized in connection with the Canadian Divestiture. For additional information, refer to Note 7 of the Notes to the Financial Statements. Net Loss on Foreign Currency Derivative Contracts Associated with Acquisition of Investment We recognized a net loss in connection with the settlement of foreign currency option contracts entered into to fix the U.S. dollar cost of the November 2018 Canopy Transaction. Restructuring and Other Strategic Business Development Costs We recognized costs primarily in connection with the development of a program specifically intended to identify opportunities for further streamlining of processes and improving capabilities, linking strategy with execution, prioritizing resources and enabling a new enterprise resource planning system (Fiscal 2019 and Fiscal 2018). Deferred Compensation We recognized an adjustment related to prior periods to correct for previously unrecognized deferred compensation costs associated with certain employment agreements. Transaction, Integration and Other Acquisition-Related Costs We recognized transaction, integration and other acquisition-related costs in connection with our acquisitions and investments. Loss on Contract Termination We recognized a loss in connection with the early termination of a beer glass supply contract with Owens- Illinois, a related-party entity with which we have an equally-owned joint venture which owns and operates a glass production plant located adjacent to our Nava Brewery. Costs Associated with the Canadian Divestiture and Related Activities We recognized costs in connection with the evaluation of the merits of executing an initial public offering for a portion of our Canadian wine business (Fiscal 2017) and net costs incurred in connection with the sale of the Canadian wine business (Fiscal 2018 and Fiscal 2017). In addition, in connection with the Canadian Divestiture, we recognized a trademark impairment loss for trademarks associated with certain U.S. brands within our Wine and Spirits portfolio sold exclusively through the Canadian wine business, for which future sales of these brands were expected to be minimal subsequent to the Canadian Divestiture (Fiscal 2017). 33


  • Page 44

    Other Gains (Losses) We recognized gains primarily in connection with the sale of certain non-core assets (Fiscal 2019) and the reduction in estimated fair value of a contingent liability associated with a prior period acquisition (Fiscal 2018). Gain on Sale of Business We recognized a net gain on sale of the Canadian wine business. Income (Loss) from Unconsolidated Investments We recognized an unrealized net gain from the changes in fair value of our securities measured at fair value (Fiscal 2019 and Fiscal 2018), and a net gain in connection with the sale of our Accolade Wine Investment (Fiscal 2019). For additional information, refer to Notes 2, 7 and 10 of the Notes to the Financial Statements. Fiscal 2019 Compared to Fiscal 2018 Net Sales Dollar Percent Fiscal 2019 Fiscal 2018 Change Change (in millions) Beer $ 5,202.1 $ 4,660.4 $ 541.7 12% Wine and Spirits: Wine 2,532.5 2,556.3 (23.8) (1%) Spirits 381.4 363.6 17.8 5% Total Wine and Spirits 2,913.9 2,919.9 (6.0) —% Consolidated net sales $ 8,116.0 $ 7,580.3 $ 535.7 7% Beer Segment Dollar Percent Fiscal 2019 Fiscal 2018 Change Change (in millions, branded product, 24-pack, 12-ounce case equivalents) Net sales $ 5,202.1 $ 4,660.4 $ 541.7 12% Shipment volume 294.1 268.0 9.7% Depletion volume (1) 8.8% (1) Depletions represent distributor shipments of our respective branded products to retail customers, based on third- party data. The increase in Beer net sales is primarily due to (i) $446.5 million of volume growth within our Mexican beer portfolio, which benefited from continued consumer demand, increased marketing spend and new product introductions, and (ii) a $102.8 million favorable impact from pricing in select markets within our Mexican beer portfolio. Shipment volume growth outpaced depletion volume growth primarily due to timing. We expect this shipment timing benefit to reverse during Fiscal 2020. 34


  • Page 45

    Wine and Spirits Segment Dollar Percent Fiscal 2019 Fiscal 2018 Change Change (in millions, branded product, 9-liter case equivalents) Net sales $ 2,913.9 $ 2,919.9 $ (6.0) —% Shipment volume Total 58.5 59.0 (0.8%) U.S. Domestic 54.4 54.7 (0.5%) U.S. Domestic Focus Brands 33.9 33.1 2.4% Depletion volume (1) U.S. Domestic (2.6%) U.S. Domestic Focus Brands 0.6% Wine and Spirits net sales remained relatively flat as $21.4 million of lower branded wine and spirits volume and $16.2 million of unfavorable product mix shift were largely offset by a $35.5 million favorable impact from pricing. As noted in the table above, the decline in the U.S. shipment volume was not as unfavorable as the decline in U.S. depletion volume. As U.S. shipment volume should generally be aligned with U.S. depletion volume, we expect this timing difference to reverse primarily in the first quarter of fiscal 2020. As a result, first quarter of fiscal 2020 net sales are expected to decrease 10% as compared with the first quarter of fiscal 2019. Gross Profit Dollar Percent Fiscal 2019 Fiscal 2018 Change Change (in millions) Beer $ 2,830.7 $ 2,531.2 $ 299.5 12% Wine and Spirits 1,279.5 1,309.4 (29.9) (2%) Comparable Adjustments (29.9) (28.1) (1.8) (6%) Consolidated gross profit $ 4,080.3 $ 3,812.5 $ 267.8 7% The increase in Beer is primarily due to $247.2 million of volume growth and the $102.8 million favorable impact from pricing, partially offset by $46.3 million of higher cost of product sold for our Mexican beer business. The higher cost of product sold is predominantly due to $57.8 million of increased transportation costs, partially offset by $17.2 million of foreign currency transactional benefits within our Mexican beer portfolio. The Beer segment also recognized higher operational costs for Fiscal 2019, largely attributable to higher depreciation, brewery maintenance and compensation and benefits; however, these costs were offset by brewery sourcing benefits. The decrease in Wine and Spirits is largely due to $37.4 million of higher cost of product sold and an unfavorable product mix shift of $26.3 million, partially offset by the $35.5 million favorable impact from pricing. The higher cost of product sold is largely attributable to higher raw material costs, including grape, bulk wine and imported vodka costs, as well as increased transportation costs. Gross profit as a percent of net sales remained flat for Fiscal 2019 compared to Fiscal 2018 at 50.3%. This was largely due to the higher cost of product sold within both the Beer and Wine and Spirits segments, which resulted in approximately 25 basis points and 20 basis points of rate decline, respectively, partially offset by the favorable impact from Beer pricing in select markets, which contributed approximately 30 basis points of rate growth. 35


  • Page 46

    Selling, General and Administrative Expenses Dollar Percent Fiscal 2019 Fiscal 2018 Change Change (in millions) Beer $ 787.8 $ 691.0 $ 96.8 14% Wine and Spirits 508.3 515.3 (7.0) (1%) Corporate Operations and Other 197.9 165.8 32.1 19% Comparable Adjustments 174.1 160.6 13.5 8% Consolidated selling, general and administrative expenses $ 1,668.1 $ 1,532.7 $ 135.4 9% The increase in Beer is primarily due to an increase of $63.6 million in marketing spend and $33.7 million in general and administrative expenses. The increase in marketing spend is due largely to planned investment to support the growth of our Mexican beer portfolio, including support of the new product introductions. The increase in general and administrative expenses is largely driven by unfavorable foreign currency transaction losses and higher expenses supporting the growth of the business, including compensation and benefits associated primarily with increased headcount and information technology costs. The decrease in Wine and Spirits is primarily due to a decrease of $18.2 million in general and administrative expenses, partially offset by an increase of $12.0 million in marketing spend. The decrease in general and administrative expenses is largely driven by certain cost savings initiatives. The increase in marketing spend is primarily attributable to planned investment supporting the portfolio. The increase in Corporate Operations and Other is due to higher general and administrative expenses driven predominantly by an increase of approximately $28 million in compensation and benefits largely attributable to supporting our growth initiatives. Selling, general and administrative expenses as a percent of net sales increased to 20.6% for Fiscal 2019 as compared with 20.2% for Fiscal 2018. The increase is primarily attributable to the growth in Corporate Operations and Other general and administrative expenses, which resulted in approximately 30 basis points of rate growth. Operating Income Dollar Percent Fiscal 2019 Fiscal 2018 Change Change (in millions) Beer $ 2,042.9 $ 1,840.2 $ 202.7 11% Wine and Spirits 771.2 794.1 (22.9) (3%) Corporate Operations and Other (197.9) (165.8) (32.1) (19%) Comparable Adjustments (204.0) (188.7) (15.3) (8%) Consolidated operating income $ 2,412.2 $ 2,279.8 $ 132.4 6% The increase in Beer is primarily attributable to the strong net sales growth, partially offset by the planned increase in marketing spend and the higher cost of product sold. The decrease in Wine and Spirits was driven by the higher cost of product sold and unfavorable product mix shift, partially offset by pricing. As previously discussed, Corporate Operations and Other reduction in operating income is due largely to the higher costs supporting our growth initiatives. Income from Unconsolidated Investments Income from unconsolidated investments increased to $2,101.6 million for Fiscal 2019 from $487.2 million for Fiscal 2018, an increase of $1,614.4 million. This increase is driven largely by an unrealized net gain from the changes in fair value of our securities measured at fair value of $1,971.2 million for Fiscal 2019 as compared with an unrealized net gain of $464.3 million recognized for Fiscal 2018. Fiscal 2019 also benefited from a net gain in connection with the sale of our Accolade Wine Investment of $99.8 million. 36


  • Page 47

    Interest Expense Interest expense increased to $367.1 million for Fiscal 2019 from $332.0 million for Fiscal 2018, an increase of $35.1 million, or 11%. This increase is predominately due to higher average borrowings of approximately $2.0 billion. The higher average borrowings are primarily attributable to the significant purchases of treasury stock for Fiscal 2018 and the November 2018 Canopy Transaction. Loss on Extinguishment of Debt Loss on extinguishment of debt for Fiscal 2018 consists of a make-whole payment of $73.6 million in connection with the early redemption of our April 2012 senior notes and the write-off of debt issuance costs of $23.4 million in connection with the May and November 2017 repayments of outstanding obligations under the European Term A loan facility and the U.S. Term A loan facility under our applicable senior credit facility, the July 2017 amendment and restatement of the 2016 Credit Agreement and the early redemption of our April 2012 senior notes. Provision for Income Taxes Our effective tax rate for Fiscal 2019 was 16.5% as compared with 1.0% for Fiscal 2018 driven primarily by the recognition of a $351.2 million income tax benefit for Fiscal 2018 associated with the enactment of the TCJ Act, which was signed into law on December 22, 2017. For Fiscal 2018, we recognized a provisional net income tax benefit comprised primarily of benefits from (i) the remeasurement of our deferred tax assets and liabilities to the new, lower federal statutory rate and (ii) the reversal of deferred tax liabilities previously provided for unremitted earnings of foreign subsidiaries which were not considered to be indefinitely reinvested; partially offset by the recording of the mandatory one-time transition tax on unremitted earnings of our foreign subsidiaries. We completed our analysis of the income tax implications of the TCJ Act for the third quarter of fiscal 2019 and recognized an additional income tax benefit of $37.6 million resulting from a decrease in the mandatory one-time transition tax on unremitted earnings of our foreign subsidiaries. For additional information, refer to Note 13 of the Notes to the Financial Statements. We expect our effective tax rate for the next fiscal year to be in the range of 16% to 18%. This includes an estimated impact for (i) benefits related to the recognition of the income tax effect of stock-based compensation awards in the income statement when the awards vest or are settled, (ii) lower effective tax rates applicable to our foreign businesses and (iii) closing of the Wine and Spirits Transaction in accordance with the expected timeline. Since estimates are not currently available, this range does not assume (i) any future changes in the fair value of our Canopy investments measured at fair value, (ii) any gain (loss) recognized in connection with the Wine and Spirits Transaction and (iii) any equity in earnings (losses) from the Canopy Equity Method Investment. Net Income Attributable to CBI Net income attributable to CBI increased to $3,435.9 million for Fiscal 2019 from $2,303.4 million for Fiscal 2018, an increase of $1,132.5 million. This increase is largely attributable to the increase in income from unconsolidated investments discussed above. Solid operating performance from Beer contributed an additional $202.7 million of operating income. These increases were partially offset by the higher provision for income taxes discussed above. 37


  • Page 48

    Fiscal 2018 Compared to Fiscal 2017 Net Sales Dollar Percent Fiscal 2018 Fiscal 2017 Change Change (in millions) Beer $ 4,660.4 $ 4,227.3 $ 433.1 10% Wine and Spirits: Wine 2,556.3 2,732.7 (176.4) (6%) Spirits 363.6 361.1 2.5 1% Total Wine and Spirits 2,919.9 3,093.8 (173.9) (6%) Consolidated net sales $ 7,580.3 $ 7,321.1 $ 259.2 4% Beer Segment Dollar Percent Fiscal 2018 Fiscal 2017 Change Change (in millions, branded product, 24-pack, 12-ounce case equivalents) Net sales $ 4,660.4 $ 4,227.3 $ 433.1 10% Shipment volume 268.0 246.4 8.8% Depletion volume (1) 9.8% (1) Depletions represent distributor shipments of our respective branded products to retail customers, based on third- party data, including acquired brands from the date of acquisition and for the comparable prior year period. The increase in Beer net sales is primarily due to (i) the volume growth within our Mexican beer portfolio of $371.4 million, which benefited from continued consumer demand and increased marketing spend, and (ii) a favorable impact from pricing in select markets within our Mexican beer portfolio of $78.1 million. Wine and Spirits Segment Dollar Percent Fiscal 2018 Fiscal 2017 Change Change (in millions, branded product, 9-liter case equivalents) Net sales $ 2,919.9 $ 3,093.8 $ (173.9) (6%) Shipment volume Total 59.0 69.2 (14.7%) Organic 58.6 59.3 (1.2%) U.S. Domestic 54.7 55.0 (0.5%) Organic U.S. Domestic 54.4 55.0 (1.1%) U.S. Domestic Focus Brands 33.6 31.8 5.7% Organic U.S. Domestic Focus Brands 33.4 31.8 5.0% Depletion volume (1) U.S. Domestic 0.9% U.S. Domestic Focus Brands 6.6% The decrease in Wine and Spirits net sales is due to the Canadian Divestiture of $311.2 million, partially offset by net sales from acquired brands of $50.4 million and organic net sales growth of $86.9 million. The organic growth is due largely to favorable product mix shift of $129.5 million, partially offset by lower branded wine and spirits volume of $39.9 million driven predominantly by brands within our wine and spirits portfolio other than our Focus Brands. 38


  • Page 49

    Gross Profit Dollar Percent Fiscal 2018 Fiscal 2017 Change Change (in millions) Beer $ 2,531.2 $ 2,149.3 $ 381.9 18% Wine and Spirits 1,309.4 1,352.3 (42.9) (3%) Comparable Adjustments (28.1) 17.4 (45.5) NM Consolidated gross profit $ 3,812.5 $ 3,519.0 $ 293.5 8% NM = Not meaningful The increase in Beer is primarily due to (i) the volume growth and the favorable impact from pricing in select markets within our Mexican beer portfolio of $190.2 million and $78.1 million, respectively, and (ii) lower cost of product sold for our Mexican beer business of $140.5 million. The lower cost of product sold is primarily due to operational and foreign currency transactional benefits within our Mexican beer portfolio of $89.6 million and $30.3 million, respectively. The decrease in Wine and Spirits is due to the Canadian Divestiture of $131.2 million, partially offset by organic gross profit growth of $62.2 million and gross profit from the acquired brands of $26.1 million. The organic growth is due largely to favorable product mix shift of $93.2 million, partially offset by higher branded wine and spirits cost of product sold of $25.9 million. Gross profit as a percent of net sales increased to 50.3% for Fiscal 2018 compared with 48.1% for Fiscal 2017 primarily due to (i) lower cost of product sold for the Beer segment, (ii) the favorable impact from Beer pricing in select markets and (iii) the favorable Wine and Spirits product mix shift, which contributed approximately 185 basis points, 55 basis points and 40 basis points of rate growth, respectively; partially offset by an unfavorable change in Comparable Adjustments, which resulted in approximately 60 basis points of rate decline. Selling, General and Administrative Expenses Dollar Percent Fiscal 2018 Fiscal 2017 Change Change (in millions) Beer $ 691.0 $ 616.9 $ 74.1 12% Wine and Spirits 515.3 559.9 (44.6) (8%) Corporate Operations and Other 165.8 139.9 25.9 19% Comparable Adjustments 160.6 75.7 84.9 NM Consolidated selling, general and administrative expenses $ 1,532.7 $ 1,392.4 $ 140.3 10% The increase in Beer is primarily due to increases in marketing spend of $46.1 million and general and administrative expenses of $27.9 million. The increase in marketing spend is due largely to planned investment to support the growth of our Mexican beer portfolio. The increase in general and administrative expenses is predominantly driven by higher expenses supporting the growth of the business. The decrease in Wine and Spirits is primarily driven by the Canadian Divestiture of $81.1 million, partially offset by an increase in marketing spend primarily due to planned investment to support our organic growth and acquired businesses of $32.4 million. The increase in Corporate Operations and Other is due to higher general and administrative expenses primarily attributable to increases in consulting of $12.8 million and compensation and benefits of $11.0 million, both largely attributable to supporting the growth of the business. Selling, general and administrative expenses as a percent of net sales increased to 20.2% for Fiscal 2018 as compared with 19.0% for Fiscal 2017. The increase is primarily attributable to the unfavorable change in Comparable Adjustments and the growth in Corporate Operations and Other general and administrative expenses, which resulted in approximately 135 basis points of rate growth, partially offset by a benefit of approximately 25 39


  • Page 50

    basis points from the divestiture of the Canadian wine business, which had a higher rate of selling, general and administrative expenses as a percent of net sales as compared with the rest of the Wine and Spirits business. Operating Income Dollar Percent Fiscal 2018 Fiscal 2017 Change Change (in millions) Beer $ 1,840.2 $ 1,532.4 $ 307.8 20% Wine and Spirits 794.1 792.4 1.7 —% Corporate Operations and Other (165.8) (139.9) (25.9) (19%) Comparable Adjustments (188.7) 204.1 (392.8) NM Consolidated operating income $ 2,279.8 $ 2,389.0 $ (109.2) (5%) Operating income growth in our Beer segment was driven predominantly by the factors discussed above. Wine and Spirits remained relatively flat as the loss of operating income in connection with the divestiture of the Canadian wine business was offset by the growth factors discussed above. Income from Unconsolidated Investments Income from unconsolidated investments increased to $487.2 million for Fiscal 2018 from $27.3 million for Fiscal 2017, an increase of $459.9 million. This increase is driven largely by an unrealized net gain from the changes in fair value of our securities measured at fair value of $464.3 million. Interest Expense Interest expense remained relatively flat for Fiscal 2018 as compared to Fiscal 2017 as a lower average interest rate of approximately 30 basis points was offset by higher average borrowings of approximately $645 million. The lower average interest rate is predominantly due to the issuance of the lower rate December 2016 Senior Notes, May 2017 Senior Notes and November 2017 Senior Notes and the repayment of the higher rate August 2006 senior notes and January 2008 senior notes. The higher average borrowings are primarily attributable to the purchases of businesses and treasury stock, net of proceeds from the Canadian Divestiture, during Fiscal 2017. Provision for Income Taxes Our effective tax rate for Fiscal 2018 was 1.0% as compared with 26.4% for Fiscal 2017 driven primarily by the recognition of a $351.2 million income tax benefit for Fiscal 2018 associated with the enactment of the TCJ Act, which was signed into law on December 22, 2017. For Fiscal 2018, we recognized a provisional net income tax benefit comprised primarily of benefits from (i) the remeasurement of our deferred tax assets and liabilities to the new, lower federal statutory rate and (ii) the reversal of deferred tax liabilities previously provided for unremitted earnings of foreign subsidiaries which were not considered to be indefinitely reinvested; partially offset by the recording of the mandatory one-time transition tax on unremitted earnings of our foreign subsidiaries. Our effective tax rate for Fiscal 2018 as compared with Fiscal 2017 was also favorably impacted by: lower effective tax rates applicable to our foreign businesses; the recognition of the income tax effect of stock-based compensation awards in the income statement when the awards vest or are settled in connection with our March 1, 2017, adoption of FASB amended share-based compensation guidance; and the new, lower federal statutory rate of 32.7% associated with the TCJ Act, as compared to the federal statutory rate of 35% in effect for Fiscal 2017. 40

  • View More

Get the full picture and Receive alerts on lawsuits, news articles, publications and more!